It’s a really good question @Wilbury17 and I’ve had similar thoughts.
I think part of the answer is that it really depends on your strategy (and your biases) – I am trying to add the highest quality businesses when they look like good value and hold them for as long as they remain high quality.
For disclosure AD8 is my highest conviction business but at the current price not my highest conviction opportunity.
So in theory it shouldn’t be my biggest but it is – because I can’t bear to sell it. This is probably the worst reason to hang on so let me try to explain…
Biases
Partly, I am biased by past experiences… Another high quality business I hold PME, looks expensive too but each time I have sold it has been a mistake for 2 reasons – 1) it maintains / improves it’s quality and 2) time keeps ticking away (I am not active in trimming and adding frequently).
I am now down to 1/4 of my original PME position which is a 20 bagger for me. So needless to say I should have just held it all while it remained / improved it’s quality.
While different in many ways, I see AD8 as a similarly high quality business although less mature.
I actually think these metaphors (especially vs PME!) can be very dangerous as it can relax your critical thinking in favour of an overly simplistic heuristic but for now, it’s a useful model to think about how to deal with a bulging position in one of the best businesses I have ever owned.
I sold ¼ of my AD8 position at < $9 less than a year ago on valuation grounds and in the interests of better position sizing / portfolio balance / diversification. Needless to say this now feels like a mistake.
I was on here a while ago posting a valuation of $25 for AD8 when its price was about $15 from memory. I actually thought the 1H 24 result had a good chance of being weaker than expected and the price might fall but here we are.
Ask the Bear
As @Bear77 says, you can’t really value AD8 on the usual statistical models as these make no sense. My high level thesis is similar to what @Bear77 7 laid out here.
I used a probability weighted (Base, Bear & Bull cases) simplified DCF model to come up with $25. But that was before the 1H 24 result and I didn’t think the market would get here so quickly. It seems the 1H 24 results are maybe being extrapolated, despite Aidan saying they won’t be repeated in (the typically stronger) H2.
The risk with my approach is that the price falls significantly from here – because of the FY24 result or some other reason.
If the recent highs turn out to be all time highs, holding here will be a very expensive mistake. If recent highs are not surpassed for a long time, I will also forego (unrealised) returns – this is the biggest risk I expect.
Quality, quality, quality
The best businesses are always setting new highs and that’s what AD8 has been doing, while the business quality (mkt position, cash position, moat, margins, mgmt. execution, etc), and the market opportunity (TAM growth, Industry tends, adjacencies, optionality, etc) have both been improving.
Part of my thinking is that with the highest quality businesses it’s more important to be right about the quality, the market opportunity and how these change over time than the valuation / price - not my idea but can't recall where I stole this from.
So my plan is to focus more on tracking the business quality and market opportunity than the market price vs valuation estimates or the position size in my portfolio. Can’t ignore these of course, but I don’t want to be spurred into action by them when the biggest returns from the best companies are made by holding for a long time.
It helps that I first bought AD8 in 2018 and my average cost is $5.26, mainly thanks to Covid belting it. So I have been following closely, through ups and downs for a while, hence my high level of conviction. Only time will tell if my biases will outweigh my execution of a sensible strategy...
Disc: Held (23%)