Luck and Position Management Revisited

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In the last couple of weeks or so I've had posts about understanding the role luck plays in portfolio management and the importance of managing position sizes in the portfolio. Both of these ideas converged yesterday when client and RRGR holding Novo Nordisk (NVO) took a swift kick in the stock price after the FDA said ni to Tresiba.

In terms of revisiting luck, a couple of weeks ago we rebalanced our position down in the stock. This was not across the board but was a case by case rebalance and not every client sold. Clients at 3% didn't reduce down to 2% for example but some for some clients it was prudent to sell down some shares based on how large the position grew for them.

From the market's perspective I would say there was no chance that Tresiba wouldn't be approved. This turned out to be incorrect of course. I will say that this does seem like an odd development. Odd or not, that we sold any stock before the drop certainly was lucky to some extent, a lot or a little I don't know but certainly luck was involved. However, it was also bad luck that we didn't sell more at that time.

This gets us to revisiting the need to manage position sizes which we talked about recently (linked above) with the one advisor who apparently didn't manage his clients' Apple (AAPL) at all. If you buy a stock and hold it long term then there are three possible outcomes. It will either grow somewhat inline with the portfolio (so probably won't need to be rebalanced), will do noticeably better than the portfolio (which might then require action) or will do noticeably worse then the portfolio (which might require a different action).

Some people have objective trigger points for this sort of thing but I don't. The way I view it, actively managing a portfolio means keeping tabs on the news and the price action of each holding. Objective trigger points are not right for me but may be right for you. It doesn't necessarily matter how you go about this as long as something is done in this regard.

It is not possible to be precisely correct with every rebalancing trade but that isn't really the point, the point is managing risk.

One curious aspect of this episode is that NVO dropped down to where it was just five weeks ago.