Hi @ArrowTrades -- great question!

Having bought a house earlier this year my actual portfolio has diverged a little from what's on Strawman (essentially, i had to sell a bunch of stuff, and part of the decision was based around tax considerations etc etc), but in general terms they are still very similar.

You'll see on SM that I haven't bought shares in SGI or CAT for a while, and actually sold down both a little -- partly because of the weightings, and partly to free up cash for other purchases. But yeah, the weightings are still way up there -- largely as a consequence of ongoing share price appreciation (not a terrible problem to have!).

I could easily reweight, but I still think both represent decent value and for each the thesis is playing out well. I've also learnt (the hard way) that overthinking portfolio 'balance' has been more of a hindrance than a help to me in the past. I don't mind a bit of concentration in high conviction ideas and it's often good to let your winners run when the share price gains are being supported by a genuine improvement in the underlying fundamentals.

All that being said.. it is certainly a...er... let's call it 'bold' move to have ~40% of my portfolio in 2 companies. I probably should fine tune things a bit more.

Let me ask you the same question -- you also have a high concentration here on SM (although I note a lot is essentially in cash proxies). A defensive positioning due to a bearish macro outlook?

@ArrowTrades

When talking about portfolio 'balance' I'd be interested to know the average number of companies and weightings held by strawman group members and/or the average small cap investor. I wonder if @Strawmancould get that data from the strawman site. I have seen portfolios upwards of 20 stocks and I don't know how anyone could have the time to informed enough about the companies, the competitors and each sector to make an educated investment. Especially if people have a full time job and/or family. Though a fund with multiple investment analysts could do this. Or if you were friends with multiple @mikebrisy . I have found much more success in a concentrated portfolio.

Hi @Kayy - I usually hold between 8 and 12 companies in my super, plus some managed funds, including some units in a managed infrastructure fund, and some cash. Outside of superannuation I have usually held between 18 and 40 companies, with a target of around 20 to 24 because that to me represents enough diversification without getting to the point where a position doubling makes very little difference to the portfolio because there are so many positions. Beyond 30 companies I find that keeping on top of them all is more like work than fun, and so I tend to usually stick to companies I know well, or spend some weeks researching a new company and thinking about it before taking a position.

I am currently in a different situation of having to try to avoid capital losses until March/April 2026 when I intend to withdraw most if not all of my super; I can't get it until then. So outside of super I am currently just holding 6 companies at this point, and would be happy with anywhere between 4 and 7, and I am watching them closely. So I have a low risk tolerance at this point.

My own opinion is that how many companies you hold (position numbers) should be directly proportional to the amount of time you have available to keep on top of them to a point where they either remain high conviction choices or you sell out of them and buy something better. But there are so many other inputs into that, with risk tolerance being a big one (especially for me right now), but also how much you enjoy direct investing, including the research side of it - if you don't enjoy it then managed funds or ETFs are probably a much better and safer option for sharemarket exposure. I have to pick my son up from school now, but I might add some more later to this.

In terms of weightings, I think that depends on (1) your level of conviction and (2) the risk/reward equation or more specifically your analysis of the real risks that the company faces and how likely they are to happen, and the damage they might do. For instance, I wouldn't put half my investable capital into a microcap or nanocap company with significant debt and very few customers, even if they seemed to be very undervalued and had a good growth runway ahead of them, because there are significant risks if things don't work out for them as they have planned them to. A company in that sort of situation, especially with debt and reliant on a small number of clients for revenue, is at real risk of cashflow issues at some point if things turn pear-shaped on them, and that could mean raising capital at a significant discount, which would dilute any shareholders who didn't tip in more money to maintain their percentage ownership, or, worst case, they could call in the Administrators and go broke.

Another issue is your investment time horizon in relation to risks. We have been talking about Mineral Resources (MinRes, ticker code: MIN) who recently got down to around $30, and are now back closer to $40/share, and because I have an eighteen month time horizon at this point for my investments, and I will then re-evaluate after re-organising my investments at that point, I didn't want exposure to MIN while they were falling on the back of lower lithium and iron ore prices, despite their very solid mining services (iron ore crushing, loading and hauling) business and asset base that meant MinRes were not going to go broke even though they currently have significant debt (in the billions). If you had a five year time horizon or greater that would be a different story - and I think MIN would be a good pick-up at those levels, and they likely still are, and those who were buying down near $30 have made a quick circa 26% gain (on paper at least) in only about one week - which is a phenomenal return if you annualise it! MIN got down to intra-day lows of $29.51 and $29.84 on the 9th and 10th of this month and they closed today at $37.80, so the bottom was likely down around $30. It looked like they were going lower to me, but it looks like I was wrong about that.

Point is, my decision not to hold them down there (I sold out of MIN in the $50s recently) was about risk management and my low risk tolerance and because I thought there was a GOOD CHANCE they could go lower and that their share price might not recover within 18 months. So time horizons for investments are influenced by multiple factors however the main ones are probably your stage in life and your available investable cash (/capital). For anybody with money that they absolutely would NOT need to touch for a minimum of five years, I agreed that MIN was likely a buy in the $30s (again, probably still are), but I continue to maintain that there is still a significant chance that they COULD go lower within that period.

But they aren't going broke, so they could be a great investment at current levels or below for patient money. Not advice by the way, just thoughts.

I personally have my largest exposure to a company that I believe has the best chance of continuing to pay me above-market fully franked dividends regardless of performance (due to their profit reserve - they are a LIC) and that I also feel has no more downside risk than the ASX200 (or XJO - their benchmark index) - or not significantly greater downside risk, in terms of total shareholder returns (dividends plus capital gains/losses) over the next 18 months.

My second and third largest exposures are to engineering and construction companies that many would consider higher risk, but that I consider low risk because of (a) their net cash and zero debt, (b) their track record in their industry, (c) their history of profitability and rising dividends , (d) their very high insider ownership which means their management are well aligned with ordinary retail shareholders, and (e) tailwinds that I think they have now and will have in the future.

In other words, two of my highest conviction companies are my second and third largest positions.

One of my smallest positions is Cooper Energy, because while I think they are undervalued due to their position as a supplier of South East Coast Australian Natural Gas (they're an oil & gas production company that mostly produces gas) and the tailwinds that I believe they will have in the near-to-mid-term future with rising demand for gas in that part of Australia (Victoria and Eastern NSW, including Sydney), my level of conviction in the investment thesis for COE (Cooper Energy) is not as strong as it is for those other companies. And COE do have debt. And they have had significant rehabilitation obligations in prior years, and may have more in the future. So there is more that can go wrong. So I hold a smaller position.

So my weightings will depend on my level of conviction for each company but also what it is I'm trying to achieve with that position, and over what timeframe. Peter Lynch said "Know what you hold, and why." That's my number one rule.

I may add some more here later (again)...

@Bear77 That was some really solid points, I appreciate the follow up with the detailed response.

No worries @Kayy - my Strawman.com portfolio here is just to show that you can achieve above-market returns with a diversified portfolio of quite a few different companies rather than by being lucky - or highly skilled - with a super-concentrated portfolio. However, I tend to hold my largest positions here in real money portfolios, and no longer hold the smaller ones. I have held all of them at various times but have recycled the capital into other ideas in real life with many of them over the years. I held a lot more of them in a portfolio that I sold up in June this year, and I haven't bought back into them in real money portfolios just because I have a new shorter term investment horizon in real life now. For the next 18 months. And then things will change again. But I haven't made wholesale changes here on Strawman.com like I have recently in real life.

Cheers @Strawman My real life portfolio doesn't look much like on Strawman at all. I was busy and hadn't kept an eye on SM portfolio or updated it much for 12 months. But I will try clean it up now I am back on the forum more.

I also like to do some shorter term stuff which usually involves buying around announcements, so it's not really comparable with SM and End of day purchases.

I am not bearish atm and I don't play the macro in anyway what so ever.

On the topic of weightings, IMO It is a good idea to take a high conviction approach, but important to know what that means to you and your strategy specifically. For example if you're someone that does 2 super deep dives on companies every month (24 a year) and narrow it down to 5 or 6 to buy, that's great. If your strategy is using software to scan thousands of stocks for certain metrics and signals and you then narrow it down to 50 I would argue that too is high conviction.

As a general rule of thumb, as long as I am being picky enough and saying no to the majority of ideas my strategies throw up, I think I am on the right path.

@ArrowTrades ,@Bear77 and @Strawman I really appreciate the discussion topic and love all the different reasoning for everyone’s weighting.  Has made me re-look at my RL portfolio (because like many of you my SM portfolio has got pretty out of sync) to try and distill some learnings.  

Here’s a quick overview.  I look at my portfolio based upon part of the market (i.e. ASX200 vs the rest).  That’s probably an incorrect way to do it because index shouldn’t really matter.  However, I see that the two parts of the portfolio behave pretty differently.  I’m also in what I would consider a transitional life stage (close enough to qualifying for my Super that I can see the value of it, but still far enough away that I should be still be taking some risks to get another doubling).

My ASX200 portfolio has 24 positions ranging from 20% weighting down to the bottom dozen being 1 or 2% weightings.  According to Sharesight this portfolio has returned 12.69% p.a for the last 5 years which has beaten the STW benchmark of 8% p.a..  I’ve held most positions in here for a long time and have to say there are a few things that are anchoring behaviour in relation to these stocks.  These are the things about my biases that are most useful for me to learn

• The small positions are too small to even do any analysis on (hence couldn’t tell you if they are good or bad) … so should probably get around to selling
• The tax position is a major consideration.  Due to length of holding period there is pretty big unrealised CGT obligations for all these positions
• The “divvies” are starting to become appealing to the “I’m closer to super than I used to be” part of me.
• I’ve lost out on an energy thematic recently but I still maintain conviction about energy long term though should be a bit more active with cyclical stocks
• My attention on this portfolio has shifted towards selling covered calls to squeeze out an extra 2-3% per annum return.  With rule of 72 the reinvestment of those proceeds could be the difference with about 10 years to go.

My ASX small cap (aka Strawman RL) portfolio which is about half the value of the ASX200 portfolio contains 33 positions.  According to Sharesight I’m -2.69% over the last 5 years on this portfolio.  It’s also got pretty uneven weighting (30% DRO and 30% in the next 5 positions).  Individual returns are all over the place reflecting the volatility in this part of the market (especially as I originally built the portfolio around “pre-profit companies that were ready to go to the moon”).  The biases I’m learning here are:

• maybe I’m giving these companies too long to prove themselves
• I’m not ruthless enough to cull under performers quickly and redeploy the capital
• I struggle to develop a deep enough conviction to deploy large positions
• I find the initial research fun, but the ongoing tracking of performance against thesis not so engaging.  I would probably be better to have a very small number of positions where it matters if I don’t pay attention.  
• My reticence to transact and my dislike of CGT may be a bit of a hinderance in this part of the market.  
• I should really clean up the long tail or work out whether I’m leaving it there because “it might come back” or “there is a lesson I need to teach myself”
• On the positions that have performed, I need to get rid of anchoring bias of the price I originally paid and learn how to add to my winners.
• In this part of the market, I’m expecting to hit some big home run multi-baggers but have more strike outs as well
• The lack of dividends and inability to write covered calls is something I need to get over.
• 
  

I’ve also got substantial Nasdaq and NYSE portfolios as well, but that’s for another day. Anyway, thanks for triggering some introspection. 

Great discussion, and really interesting to see the different approaches.

Goes to show there are many paths to victory, and you need to find an approach that best aligns with your own temperament, time and interests.