In spite of his young age, John Smith has amassed a substantial stock portfolio; 40% of his holdings are in just five companies: MercadoLibre, Axon, United Rentals, Crocs, and Tanger. Smith claims he has no intention of selling off these wins, even though advisers have urged him to diversify.
“I intend to apply principles from investing greats Peter Lynch and Warren Buffett and keep everything with my top holdings the same,” said Smith.
What Lynch and Buffett Have to Say
In a letter from 1988, Buffett agreed with Lynch that the majority of investors make a mistake by holding on to losing investments rather than selling winnings.
We couldn’t be more different from the people who cling on to failing enterprises while hastily selling and cashing in on successful ones.
According to Buffett, Peter Lynch’s analogy of “cutting the flowers and watering the weeds” is spot on.
In his analysis, Smith found that the top five holdings account for just 18% of his entire portfolio cost basis, with average positions accounting for roughly 3.5% each.
However, due to their dramatic increase in value, these equities currently account for 40% of his overall portfolio.
From the get-go, this wasn’t a conscious decision. “What has worked and what hasn’t is the natural outcome of my portfolio concentration at the top,” he added.
Why Smith Refuses to Cut His Winners
Smith agrees with Buffett and Lynch that selling off companies when they start underperforming is a better strategy than cutting good companies. Additionally, MercadoLibre, Axon, United Rentals, Crocs, and Tanger continue to show good progress in his opinion.
MercadoLibre (NASDAQ: MELI) – This Latin American e-commerce and digital payments provider has seen revenue grow 10x over the past 5 years. With ongoing needs for its services, Smith expects robust expansion ahead. Operating profits are also skyrocketing.
Axon Enterprise (NASDAQ: AXON) – Supplying Tasers, body cams, and software to law enforcement, Axon enjoys strong customer retention and a large backlog. Its reputation has opened up bigger markets like federal agencies and international, fueling growth.
United Rentals (NYSE: URI) – The little-known largest equipment rental firm in America has crushed the market over the past decade, with 650%+ gains. By gobbling up competitors, it quietly expands its dominance. Simple yet effective.
Crocs (NASDAQ: CROX)- Hitting almost $4 billion in 2022 sales, Crocs may not take the world by storm but sports a superb 26% operating margin. Reducing debt and buying back stock boosts value, and the P/E of under 10 leaves room for upside.
Tanger Outlets (NYSE: SKT)- This retail REIT enjoys 98% occupancy and can meaningfully lift cash flow as 60% of leases come up for renewal by end-2026. Rent hikes would directly feed into higher dividends.
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The Verdict: Still Blooming
What this means is that Smith’s poor investments have lost value over time, while the five equities I listed above have gained value. My portfolio has gravitated towards my winners as a result of my decision to let things be.
In addition, I have no plans to reduce or sell any of my top five holdings in the next year since I am optimistic about their future performance.
He acknowledged that this strategy may lead to more volatility, but he thinks the greater danger is selling promising startups before they’re ready. Because these five are “flowers that are currently still blooming,” Smith is happy to let them continue to bloom in his investment garden.