Portfolio Clinic articles always seem popular and today feels like a good time to fit one in before the likely madness of tomorrow’s dividend announcement.
Be sure to join me tomorrow as I’ll be doing the usual State of the Market combined with a Live Blog on the announcement for as long as I still have something to say!
After a long period where we’ve been constrained by an inability to sell in much of 2020 for obvious reasons, we are finally seeing a market that is giving us credible choices to make.
Often these choices are tough. But it feels a lot better to have options for freeing up cash than feeling forced to sit on players who we didn’t want anymore by a very wide spread.
And there is certainly absolutely no shortage of value targets out there to spend that cash on, even under the existing dividend structure. Which is likely to get even more generous.
So we’re likely to be making more changes to our portfolio than we have for a while and it’s a good time to think about portfolio structure. Setting ourselves up for the season isn’t just about who is in it.
We spend a lot of time looking at players and the behaviour of the market. We usually spend less time worrying about the structure of our portfolios – how many players you have and how much you put in each player. This is essential for risk management and optimal profits.
I can’t stress enough how critical this is. Two traders could pick exactly the same players but get wildly different results depending on how they carve up their portfolio. It’s a common reason for both underperformance and why “elite” traders do so much better than most.
I’ve picked just one portfolio for an extended discussion because I think it is typical of many portfolios that I see and could be really useful.
I call it the “Almost Great” portfolio.
I’d say about 70-75% of the time when members send in portfolios this is the case. Members of my site tend to be the more thoughtful types in my experience who like to base decisions on evidence and analysis rather than just hype or youtube highlight reels as many do.
So it follows that they generally select good, FI relevant players. But that is just one contributor to getting great results and that’s the thing I think a lot of people would benefit the most from thinking about.
The "Almost Great" Portfolio
This isn’t the whole portfolio just some example screenshots that give a flavour. And it was sent in a month ago so the prices will be different now.
There is a lot to like about this portfolio. But a couple of very obvious errors too that needed fixing.
It’s quite a large portfolio at ~£125k and was sent to me by a chap enquiring about using my portfolio review service. Because it’s a solid portfolio by and large I told him he didn’t need a full review as I knew I wouldn’t need to spend a full day on it. But I was able to offer some suggestions.
Let’s start with what is good about it and then talk about how it can be better.
The player selection is generally very good. You can only see a sample above but when you go through the whole 40 there are no clangers in here at all. There was no particular player I’d point to and say this is an outright bad choice, certainly based on the information available at the time of purchase.
The structure here in terms of player numbers is good too. On discussion with him it was clear he is a reasonably active, competent trader. So 40 players is manageable for him, even though at ~£125k he is going to have large chunks of cash in individuals.
That works for him. It will upset some people to say this but I think it’s true – over diversification is for very passive traders or traders who do not know what they are doing.
These days I would consider 30-60 an acceptable range depending on preference, time commitment and confidence. The more aggressive you want to be and the more confident you are on FI the fewer players you can have.
An aggressive trader is one who is hungry for quick results and is definitely comfortable using money he is able to lose. You can have success with as low as 10 if you are very confident. But I wouldn’t recommend it for 99% of people. I did this for the New Trader Challenge in 18/19 but that was mainly to make the article exciting (and probably show off a bit).
Most of us are more balanced than that and I think around 40-50 is a good sweet spot for most. It’s plenty of diversification. There aren’t ever more than 20-30 “slam dunk” trades on FI at any one time. These are trades I think are very likely to deliver a significant profit at the lowest possible risk which should be our focus. The wider you go the more you dilute into weaker and weaker trades.
There is also a risk management benefit in keeping a compact portfolio. One of the things people struggle the most with is knowing when to sell. I frequently see examples of 65+ player portfolios that, realistically, that holder simply did not have the capacity to handle.
Most of us are busy and how many of us can really keep on top of the fortunes of 65+ players? With too many players to manage we will miss details and overlook important moments when we needed to take action on a player.
There is no single approach that works for everyone – it’s something everyone needs to think about for themselves. But I would suggest 40-50 as a good anchor point and adjust up or down depending on your individual situation and preference.
I also tend to flex this at different times of year. So for example in pre-season when there is lots of uncertainty due to team changes etc I am likely to be more in the 50-60 range.
As we get more information I will cut the weak and load up on the strong, perhaps being at 30-40 by October as my confidence in who the best selections are for the season grows.
Money Distribution and Risk Management
This is where this portfolio starts to have problems.
The fundamental issue here is managing risk. One of the ways we do that is picking good players at value prices. By and large this holder has managed that.
He’s got good players and he is taking action to sign them up as soon as he knows from this site and his own research they are quality. He isn’t waiting for social media reassurance or assurance of an actual big score to sign them up which is a common error people make.
That is too late. If everyone knows they are good you have lost your key advantage. You may own a good player but you may have missed the best value – another very common reason for underperformance.
But where we can improve this portfolio is in the money he is staking on individuals. It’s a bit whacky at times.
For example he has gone big on: Asensio (6k+). Willock (£3.7k). Zinchenko (£4.3K). Reiss Nelson (£5.5k). Jovic (3.3k). Brooks (3k+). Alex Sandro (£4.5k). Muller (5k+).
These are all good players. Even Jovic – sure he is in a very rough patch but he has positives and can recover – “toxic” players coming back into fashion happens all the time. And he didn’t overpay.
So what’s wrong with this?
Some of these have worked out very well for him. Asensio for example. Likely he read the review in Scouting early on, liked it, did some of his own looking into it and went big. He rose nicely but like many players between seasons has fallen back a bit. But he has every chance of doing extremely well going forward and I would be confident to take him into next season.
But would I have lumped 5% of my portfolio value into Asensio back then at the time of my first positive review? Hell no. Amazing as he could be he has a lot to prove. He’s working his back from a long injury and has to establish as a first team regular in a very competitive team chock full of talent.
We’ve done one part right – picking a good high potential player at value. We’ve not got the second bit right – our stake has to match the risk and staking £4.8k and continuing to hold £6k+ is poor risk management.
Here is how I would have managed this trade.
Around May I’d noted Asensio was due to return. Given I am aware of his high potential, I can either buy in anticipation at £1.80 or wait to see the first games, either is acceptable. As it happens, he scores on his first game back rising to £2.20.
If we went early, lucky for us. If we didn’t and are waiting for evidence from early games that’s a bit unlucky he did something eye catching so soon. Ideally we wanted good underlying numbers that very few others noticed.
But we can’t do much about that. What’s important is whether he is still value after the rise and I would say yes he is (and did in scouting at the time).
I would have made this a “Standard Buy” – i.e the usual amount of my portfolio value I spend on a player. In a portfolio of this size that would be 2.5% or just over £3k. It’s a sizable chunk which is going to reward me if he does well. But I’m not betting the shop on a player who is afterall coming back from injury and has to break into the team either.
Now with Asensio he got away with it.
But Zinchenko and Reiss Nelson were both high potential but high risk picks too. They are in a similar boat and this tendency to gun too hard into high risk categories has cost him here.
Both are talented and still have a chance but they always carried game time risk. The signing of Willian for example makes it particularly difficult for Nelson now and it is difficult to get out of this cheaply.
I would have been happy to buy both of these players at various points and may well have taken a loss – but I would have taken a much lower loss on trades that didn’t go my way which is crucial.
Rather than going too hard on these I would have used a “Small Buy” as they are high potential but also high risk.
A better staking strategy should lead to better results.
Many traders often feel like we are taking two steps forwards and one step back particularly this year. The hyper aggressive staking on riskier players here worked out on Asensio and Muller but it didn’t work out so far on Zinchenko and Nelson. And that leads to bang average results despite picking good players on the evidence available at the time.
We should match our stake to the size of the risk. And then adjust our stake up and down as we get new information.
For example, we could start with a Small Buy on a player like Asensio as he is returning to the side (or at most Standard). Perhaps after 3-4 consistent starts and good performances and supporting soft evidence to suggest he is now a first teamer that could be our trigger to up our bet on him to Standard Buy level.
If however he doesn’t turn out as we had hoped, we have an easier time getting out of it because we didn’t charge in so hard.
(I would however note, in fairness to this holder, that 2020 has been an usual year. So even with a great staking strategy in 2020 and with keeping a close eye out for new information we couldn’t always do much about it anyway. Very little could be sold for a reasonable price and opportunities to make changes to react to new information were limited. This is unusual though and we can expect more flexibility going forward.)
However, if we have an established first team player that has just dropped to a value price because it’s off-season there is no reason not to go straight in with a Standard or even a Big Buy. When profit potential is high but the risk is low – this is where aggression is good.
Here is an example of how a sensible staking strategy would work in a portfolio of this size using current Key Strategy thinking.
Small Buy: 1.25% portfolio value or £1.6k in this case.
We might go for maybe 10 of these high potential high risk picks in a 40 player portfolio.
Most often I would start with a Small Buy for high potential but high risk players such as young players or injured players who need to win a first team place. Or some of the older veterans at 31+ especially if they do not have a long contract.
As the player progresses I may upgrade them to a Standard Buy if they start establishing and are performing well. But if the trade is going south as plenty of young/veteran players will, I have fewer shares to get rid of.
Examples: Nelson. Muller. Esposito. Cuisance. Curtis Jones in early days (upgraded to Standard later as I saw more of him).
Standard Buy: 2.5% portfolio value or ~£3k in this case.
This will be the bulk of the portfolio, perhaps 25 of the 40 players in this portfolio.
I’d use this most of the time for an established player who I judge to be high quality at good value that doesn’t have any huge risk factors that worry me. They’ll generally be solid first teamers in prime years.
Examples: Goretzka. Brandt. Kimmich. Depay. Fabian Ruiz. Asensio (early on you could have made a case for a Small Buy on Asensio too and either is fine).
Big Buy: 5% portfolio value or £6.5k in this case.
This is a heavy bet when I’m around 90%+ confident the player is a near slam dunk profit at low risk. Or a long term premium heavy hitter.
Out of a portfolio of 40 I might have 5 Big Bets – there are not many players that warrant this huge vote of confidence at any one time.
Examples: Bruno (both before when he was at Lisbon at a value price and now at Manchester United as an established premium). Neymar. Insigne. Alcantara. Dybala. Calhanoglu when it became clear he was established yet remained extreme value. Or an Asensio if he establishes and remains around £2.50 I might make him a big buy at that point because as a first team regular I judge him capable of carrying £4+ with ease).
This has been a tough year. Probably, in terms of our own skill we aren’t really much better or worse than we were in late 2019 when the profits were coming thick and fast.
But the environment has changed in 2020 and it’s been very tough. That has likely highlighted weaknesses in our trading game that we will want to fix.
Those weaknesses have probably always been there but in a very positive market they went unnoticed.
FI is maturing now so we really need to fix these things. In my opinion huge profits are ahead BUT I do not think it will be exactly like it has been for the last 2-3 years where bad traders still made significant money.
Over the next season or certainly two I expect bad traders to start getting chewed up as FI matures as the Matching Engine makes it more like a real market.
A good staking strategy really helps us in more than one way.
It matches our stake to the risk involved. This is a crucial element of managing risk the same way buying good players at value prices is.
It makes sure we get paid when one of our players is successful. On this site we spend a lot of time making sure our selections are good. So we should be confident in them and back our choices.
The mistake in the portfolio above is gunning too hard into higher risk (but still good) players. But an even more common and equally bad mistake is the opposite – “limping in”.
This is where you buy a player but don’t really commit to them – putting in much less than a Small Buy. And even if a player does well you won’t really see much return from it. It’s a waste of time for traders who know what they are doing.
These tiny buys in which we clearly have limited confidence will suck money away from our best picks. And we want to concentrate our money in our best possible selections.
It also leads to a portfolio with so many players it is hard to keep track of – making it more likely we will miss new information and opportunities to take action.
A staking strategy like the one above, properly adjusted for our own circumstances, will set us up for success in the new season. It’s clean, well managed and has clear logic behind it.
It starts us out at a good point and then gets us thinking about the right things along the way – whether we want to be adjusting our stake in players up or down in line with new information.
As players are successful, I may sell them outright. Or I may decide I want to keep them but trim my shares to make sure they aren’t an unreasonable share of my total portfolio.
Bruno would be the best example there. Buying him at around £2.50 as a Big Buy it would clearly be unreasonable for me to have kept all of those shares at £10+. He’d be a whopping % of my total portfolio and this would be a stupid risk to carry.
Not because he doesn’t deserve £10+ I think he does. And I’m happy to keep him as a Big Buy. But any player no matter how good can have a misfortune like breaking a leg or falling out of favour and we want to keep managing our risk as we go.
I hope that gives members something to think about as we prepare our portfolios for the new season!
I’ll be back tomorrow for the Live Blog and I hope you join me again for that, it should be an exciting one and (hopefully) less controversial than the last!