Not all stock portfolios can be turned into cash easily

It was already quite some time back when a friend of mine showed me his Central Depository Statement (CDP) statement of his stock holdings. He hoped that I was able to provide some ideas how he could revamp his stock portfolio. Below was what I saw when I unfold the statement:

  1. The total sum of the stockholding was more than $200,000
  2. He has slightly more than 2 full pages of stocks. Yes, more than 2 pages.
  3. Many of the stocks are in odd lots. Some even less than 100 shares.
  4. The worth of some stocks was like $20+ to $30+ in total value.

 

On paper, it appeared that he had a net worth of more than $200k, which is quite a decent sum. However, on a closer look, I told him that he will have a hard time cleaning up this stock holding. Some of the stocks are either I do not know them or they are so illiquid that it is quite difficult to sell out totally given the odd lots that he had. In fact, it may even be better to ‘ring-fence’ the stock-holding and re-start a new one than try to micro-manage those stocks that are not even worth the while to have a second look. I felt painful for him that he was not able to convert his stocks quickly to cash without taking a significant ‘haircut’ on his more than $200k of stocks.

What I believe could the problems in this stock portfolio?

The first obvious mistake was that he probably held too many stocks. Imagine CDP statement list out the stock counters in single-lines, ie. without any line-spacing in between. Just within the first page, it could have accommodated a listing of 30 stock counters. I do not know how many stocks are on page 2, but let us put an estimate of 50 counters to occupy full page, and several stocks listed on page 3. In all, they should add up to about 85-100 stock counters. That means he owns about 10% to 13% of all the stock counters listed on the Singapore stock exchange. Just by the sheer number of stocks, I personally think it is too much for him to manage. In fact, in my opinion, the number of counters that can go beyond page one of the CDP statement is probably far too many. Think about it. Many indices around the world are made of about 30 components stocks, and this is already very representative of the respective markets. Surely, we do not need to own more shares than what is needed to form the index. With the advance in technology, it is of course possible to include more stocks in indices, but that cannot be said if we want to formulate a stock portfolio manually. In fact, according to past literatures, by the time when we hold about 12 to 18 stocks, we have already reaped 90% of the benefits of a diversified portfolio.

Another problem of his stocks holding is that many of them come in odd-lots. This means that he is not able to buy or sell efficiently. And because some of the odd lots are less than 100 shares, he may even have to buy in some shares and the sell out all the shares to combine the total shares to reduce the brokerage charges.  As expected, it does not go down well on him because the fact that he reduced his holdings by selling out the full lots and leaving the odd lots, we cannot simply expect that he will make a reversed move to buy more shares of those counters in the near future. Furthermore, I do not know if he had made any money when he sold the full lots as he might have reacted out of fear to sell out the full lots during times of impending crises. In summary, he could have write-off all these odd lots, which would otherwise impede his move to clean up his portfolio.

As a stock investor, it is important to understand that the stock market is a quasi perfect competition and many of us have no control over the on-going transaction price. In other words, we are price takers. The only thing that we can possible control is the quantity to buy or sell.  Even that may still be a limitation because, as individuals, we have limited resources. We simply cannot buy or sell any quantities of shares that we like. So it is important that whenever we buy or sell, we are mindful of the next move and how to react when something unexpected happens. It is like playing chess. We are not able to anticipate all the moves of our opponent. What we can do is to limit our damages when we encounter an attack by our opponent and leap on a strong attack when we see an opportunity. Trying to build a stock portfolio without some kind of strategy in place is doomed to fail.

Wish you luck in your investing!

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.