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The DIY Investing Podcast

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  1. All Episodes
  2. 124 - How I Value Trade Stocks

124 - How I Value Trade Stocks

Jan 16, 2022

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

Goal

  • 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. 

Summary:

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.