Take Small Positions If The Stock’s Expensive

During their recent interview on The Acquirers Podcast with Tobias, Matt Cochrane, Lead Advisor at 7Investing discussed Take Small Positions If The Stock’s Expensive. Here’s an excerpt from the interview:

Matthew: But I think you have to take it on a case-by-case basis. Now, that being said, one thing I do, especially, when it comes out– I might be getting a little ahead of ourselves. But when I build positions in my portfolio, I do it slowly. What works for me is, there’s been times, if I think a company has a great economic moat, and I’m not talking about wildly overvalued. But if I think this is not where I want this stock. Just hypothetical, let’s say, I could justify a stock trading at 30 times PE, but it’s in the high 30s or at 40 PE. Is that I my ideal valuation for that stock? No. I work it out in my head, and I look at the IRR, I could get on that position in the next few years, and I don’t know if it works. But I’ll take a small position.

If I think the moat is great, and I think it’s a great company, if I think it has the right leadership, if it checks all my boxes besides valuation, I usually do not let that stop me from establishing a position. It’s a small position. When I take these small positions, we just talked about never sell long-term buy and holding, when I take that first initial position, I don’t believe in that. I can cut these kinds of companies quick, especially, when I’m still learning about that company.

I’ll throw out a company, Palantir. I think it has very interesting management. It’s expanding into commercial applications with data analysis, and it’s using a really neat mix of human intelligence, and AI, and machine learning to do this data analysis. I think when a company or a government agency is using Palantir, I don’t think they’re leaving the Palantir platform. That’s what I say is my thesis. Its valuation, I cannot make sense of right now. So, I bought this company late last year, a very small position. Within months, it more than tripled. I didn’t know really what to do with that, because I thought in five years at its high valuation that I thought I bought it at, I thought in five years best-case scenario, it could triple. So, it tripled in a couple months. I held it. I held it and it’s come down from that. It’s still very expensively valued. But I want to keep tabs on it, and I want to learn more about it, and I think it could really surprise to the upside.

Great companies have a way of doing that. We could talk about Amazon, and AWS, and then advertising, and now, logistics, just great companies find ways to continue to find ways to make money, and they surprise you. So, I’m holding Palantir. I think it’s expensive. I don’t know if I could justify to you its valuation, but it’s a small position. If it dips a lot or it goes back to my original stock price, or it starts to grow more, and I feel that’s not reflected in the stock price anymore, I might take another little bite of it. But I usually build positions at very little bites. And by doing that, I feel there’s obviously diversification of your portfolio, you have different asset classes, and different industries within your stocks, and things like that. But I think another way to diversify is over time.

Averaging up is a big part of that. I feel like a lot of investors don’t like averaging up. I think that’s a hurdle you just have to get over. I think some people get in their heads and like, “Why?” But I have a 10 bagger in Square. So, I don’t want to add to it here. I have a 10 bagger in this company. If I add to it, well, then it’s only a two bagger. I don’t want to do that. Who wants to do that? I want to say I have a 10 bagger. You have to get over that. If you have a great company that can continue to grow–

We could take Microsoft for instance. It’s a sizable position in my personal portfolio. It’s something I’ve added to almost every year for the last six years. I bet every year at least once a year, five year. Sometimes, more than once a year. It’s something I slowly add to. Hopefully, in those times, I’m finding good times where its evaluation is more reasonable than not because every stock zigzags up and down. Hopefully, I’m trying to do that. But by diversifying over time, I feel I’m just like– the same way people dollar cost average into an index, I believe in dollar cost averaging into a great company. So, I’m a big fan of adding to a position slowly, and over time, and I don’t mind taking a small bite, especially to get started if I feel like it’s overvalued.

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