124 - How I Value Trade Stocks


Manage episode 317715203 series 2983848
By Trey Henninger. Discovered by Player FM and our community — copyright is owned by the publisher, not Player FM, and audio is streamed directly from their servers. Hit the Subscribe button to track updates in Player FM, or paste the feed URL into other podcast apps.
Mental Models discussed in this podcast:
  • Value Trading
  • Horizontal Risk Shifting
  • Rebalancing
  • Look-Through Earnings
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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode124

Value Trading Definition
  • Partial selling of a core holding to buy more of another core holding.
  • If the core position size is 20%, you may buy up to 25% or 30% of a surplus position when relatively undervalued and then sell it back when it is relatively overvalued.
  • Key: Using valuation specifically to change the weightings in your portfolio
    • Necessary assumption: Assuming you have a sufficiently good comparable idea
  • Only value trade when the exchange is clearly beneficial
  • High bar
  • 50-100% increase in look-through earnings
    • I use a spreadsheet that constantly calculates look-through earnings for each position.
Horizontal Risk Shifting
  • Diversification of my risk by reducing my exposure to a single stock without having the value trade component. May not increase look-through earnings but minimizes risk.
    • Say splitting a 30% position in Coca-Cola into a 10% position in KO, Pepsi, and Dr. Pepper.
    • Want to target similar P/E ratios or better, but this has a lower bar.
    • Really used mainly for overly high current allocations or used when a stock is highly valued.

Value Trading is the process of rebalancing a portfolio using valuation specifically to adjust the weightings of your individual stocks. I value trade to optimize the performance of my portfolio, increase returns, and reduce risk.

133 episodes