Portfolio Clinic articles have proven popular in the past and I had time to fit one in today!
I’ll look at two recent real portfolio examples that I’ve seen from members and share my recommendations on how to make them more profitable.
At the end, I will also include some of the best questions I’ve had from members and my answers which is something I think I will do more often – if one member is asking a question the chances are a lot of others are thinking it too!
The Impulsive Portfolio
This isn’t the whole portfolio just some example screenshots that give a flavour.
Diagnosis
There are some good selections in this portfolio.
But my first observation is that it is a bit messy.
There is no real structure to it with seemingly random amounts of money in each player – and this is what you usually end up with when you are a bit impulsive and tend to chase big scores or follow tips or social media chatter.
Not many people think about “structure” a lot – we tend to think about what players we want quite naturally. But structure is hugely important to your total returns at the end of the day.
In a portfolio this size, what is the point in having 10 shares in Bruno Fernandes? It’s trivial. Similar with 75 shares in Emerson or 103 shares in Bastoni.
When we are putting a lot of time and effort into our selections we want to get paid when they do well. That means we have to commit to our picks, not do what I call “limping in” (I steal a lot of my terms from poker!). As a general rule I recommend committing to the player or not – make a decision.
Another issue here (also often caused by impulsiveness) is the tendency to buy late as a player is rising. This means our buy price isn’t always brilliant, and often we will then suffer a loss as other people dump the player.
In the screenshots you can see Bentaleb, Pereiro as examples. In the wider portfolio there are actually worse ones including Halstenberg bought at £1.61 at peak hype who has dropped to £1.29 now. That is actually a huge loss.
And this is the bad type of loss – the one you really don’t want to take. This was completely avoidable – I’d highlighted that Halstenberg was overvalued for that sort of money in Scouting well in advance of the drop and this happens very regularly (see pre-season predictions – my cautious reviews on players were warranted 97% of the time pre-season to December).
(Incidentally, after the drop and in the current situation I quite like Halstenburg for this money – see this weeks scouting).
The third main issue I see is that some of these players are really bang average and basically always were – they never really had much going for them. Someone like Godfrey or Vallejo (who is in the port though not on those screens) you can see why someone might buy them but they are basically unremarkable.
Vallejo for example has a Real Madrid connection so is a player a pumper might try to get going but on it’s own that is not enough. We want real performance quality or a path to a first team if we are buying.
This basic idea of “I’ll just buy anyone who has played for Spain U21” – that’s not analysis. You don’t have anything that nobody else knows here. It’s too obvious.
A much better mindset would be “I am going to review the Spain U21 players and cherry pick the very best of them”.
Prescription
Fix the Structure
Set a target for the number of players you are comfortable with in your portfolio, I typically recommend somewhere between 30-50 for most people.
For a balanced approach, have around 2.5% of your portfolio value in each player, with 5% for a “big bet” when you are super confident you have found a bargain.
We want to commit to our picks with a decent chunk of cash so that we get paid when we do well.
Equally, we may want to start trimming shares in players if they go above 5%-10% of our total portfolio value (even if we want to keep the player). This is one way of managing risk – no matter how good a player may be – anyone can get injured or suffer some bad luck.
See my Guide on this topic for more on portfolio structures, which also discusses different options that may suit different people.
Bear in mind – I wouldn’t spend a ton of time making sure every player squarely matches 2.5% all the time – I don’t. It’s just a ball park guide.
Stop Chasing Big Scores and Social Media “tips”
I think I said this the other day but it comes down to this – if we are waiting for match days or social media to tell us who is good we are doing FI wrong.
The best profits in all forms of trading come when you act on information that the vast majority of people do not have. When that big match day score pops up – everyone knows and buying then does not give you an advantage.
Through research we should find out which players are good quality and match the trends ahead and then when they hit their big score or whatever positive event we are aiming for all we have to do is watch other traders come to us.
Obviously, that isn’t easy – good research takes time and skill but members can cheat a bit because you have access to my scouting and key strategy.
Raise our Standards
If we focus our portfolio as above into a tighter group of players, with 2.5% to 5% portfolio value in each we must combine that with being more selective than this portfolio has been to date.
Our portfolio should be an exclusive club – somewhere we only let the best of the best into.
Pretend you are managing Barcelona rather than Stoke.
There is no point focusing our money on bad picks – that will actually make things worse.
This tendency to go for mediocre selections should go and we should only let players into our portfolio when we are convinced we’ve got real quality/value.
Playing for Spain U21 or being a Real Madrid loanee is not enough. It is a nice background factor but we want to combine this with other factors like performance suitability, a transfer prospect or a chance of a substitute appearance.
We want to give ourselves multiple ways to win on each trade.
The Snorefest Portfolio
Here is another, shorter, example of almost the complete opposite problem from the portfolio above.
It is possible to be too structured. Too conservative.
This can actually be fine if you are a long term thinker who is happy with steady gains and wants a low maintenance portfolio.
But, realistically, most people don’t want to let the big gains slip by. You can’t do that however without branching out and taking a bit of risk.
All I had here is the list of players not the portfolio screens. From the chat though – he is following the structure of 2.5% to 5% in each and it is a very well organised portfolio.
Diagnosis
As a solid core of a portfolio there is zero wrong with this. These are all great picks in their own way and would make up the bulk of what I would call in Key Strategy the “core performance” element.
This is a key part of a good portfolio for most people. You can of course run alternative strategies like ignoring core picks and going for only the high potential youth part of key strategy if you are a higher risk higher reward type.
In Key Strategy I suggest a good balance for most people is around 40-60% in these kinds of core players but then branching out with the rest into riskier but higher potential picks like youth, transfers or off trend players (like Elite Veterans right now).
I would expect a portfolio made up of good core picks to do well, and even outperform the market overall.
But it’s unlikely to do extremely well.
Prescription
Provided the portfolio holder was keen to pursue bigger profits and was reasonably active and happy to take a little risk, I would recommend branching out a bit.
I’d sell some of these core players to make room for some higher potential picks and free up cash.
That can be done by either “salami slicing” (taking a bit off each player) or by selling specific players and keeping others.
I would try to stick to the 2.5% to 5% guideline here. I generally prefer to sell individuals and stick with my best picks and don’t generally like the “salami slicing” approach. It feels indecisive.
However, in this portfolio, there really aren’t many I’d flag as obviously weak so maybe in this case chopping a bit off everything is the way to go.
Key Strategy has definitions of the sort of more exciting player I’d fill out the portfolio with. There are also many recent examples from articles in recent weeks on wonderkids/high potential youth/defenders/elite veterans that you can access via the Dashboard > Members Article Archive. And there are always more on the way in Scouting.
This is a great core of a portfolio and the discipline is a great trading skill to have – but to get the best possible results we will also need to take a few risks too.
Matching Engine Q+A
I had some good questions come in this morning from a member on the Matching Engine so I thought I’d include them here for interest. I’ll do this more often so if you do want to send in questions – please do!
Q: What advice do you have if I want to free up a cash balance using the Matching Engine? If I don't have many I want to get rid of, do I sell players I think are decent (Isco or Lemar?) to move that money somewhere I think will do better? (Elite Veterans and IPD?)
If we’ve totally lost confidence in a player we hold it’s an easy decision to sell.
But what if we don’t have a lot of these?
If we’ve been diligent and highly selective we may be in a position where we want to free up funds, but we don’t really have too many outright bad players that scream “sell me”.
We might be looking to sell players that are actually ok just because we have a lot of players we are really keen to buy. I definitely feel like that at the moment – there is a ton of stuff from recent articles and scouting that I want but just haven’t been able to get because I cannot sell much.
Well, for starters we can be pleased that we have given ourselves a nice problem in that situation. It’s never good to be desperate to sell something. Better to be trying to find an “upgrade” on a decent player than trying to ditch something radioactive.
But we will have to deal with a tough dilemma in the coming weeks: “I think X player will do ok, but will Y player do better?”.
This is hard! It will be a learning curve for all of us and there isn’t a one size fits all answer.
My advice here would be start with the bad stuff – the stuff you have lost confidence in and get that sorted first.
It may be that we have a currently unpopular player who we can reasonably expect to bounce back later – and we may choose to just hold. But when there is no credible prospect of the player bouncing back anytime in the next 3-6 months it may be better to just take the hit and move on, even if the hit is substantial.
When it comes to selling decent players to get potentially better ones I’d be a bit selective. I generally don’t like tinkering too much. If you are happy with a player you probably picked them for a reason.
I would generally only see myself doing this when I had a target I was convinced was a near slam dunk profit and in that situation it might be smart to sell the player who is decent but might not catch attention for 2-3 months.
If the matching engine is used a lot more than market buy does that alter a players value? For example if I held Werner say he’s £6 but because most people try and get a deal, will he become much harder to sell for £6?
Will this reduce prices? Well, maybe. But the ability for people to buy at all will also increase the values in certain players and overall I think Matching Engine should push up prices in certain players.
There will be winners and losers and the more liquidity there is the more the market will start to really reflect how people feel – what I dramatically called “judgement day” recently.
I imagine there could be a bit of a mad rush when Matching Engine goes live do you think it’s a good idea to get straight in there or wait for things to settle a bit?
We’ll tend to get ourselves in that tricky situation by holding expensive hyped players who are popular but then hit some misfortune (failed transfer etc) and then suddenly nobody wants them.
These reversals where the most desirable player becomes radioactive overnight happen all the time and it is why we need to know when to lock in our profits.
Or, we could have followed a bad tip and have some random 80p nobody that looked good on the way up but now looks very sad.
Prevention is better than cure for both of these situations – it may be that if we have already made the mistake we just have to take the hit, learn the lesson and move on.
A few screw ups are in the budget – as long as it is a few and it wasn’t a really obvious mistake.
But yes, I think there are times to be patient but my instinct is that the first few days of the Matching Engine will be important as we all try to freshen up our portfolios. I think that will be a time to try to be as active as possible.
That’s one of the reasons I suggested this week we should make sure, like any good Chairman, we already know who we want rid of and who we want when the window opens.