124 - How I Value Trade Stocks

Mental Models discussed in this podcast: Value Trading Horizontal Risk Shifting Rebalancing Look-Through Earnings Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode124 Value Trading Definition Partial selling of a core holding to buy more of another core holding. If the core position size is 20%, you may buy up to 25% or 30% of a surplus position when relatively undervalued and then sell it back when it is relatively overvalued.  Key: Using valuation specifically to change the weightings in your portfolio Necessary assumption: Assuming you have a sufficiently good comparable idea Goal Only value trade when the exchange is clearly beneficial High bar 50-100% increase in look-through earnings I use a spreadsheet that constantly calculates look-through earnings for each position. Horizontal Risk Shifting Diversification of my risk by reducing my exposure to a single stock without having the value trade component. May not increase look-through earnings but minimizes risk.  Say splitting a 30% position in Coca-Cola into a 10% position in KO, Pepsi, and Dr. Pepper.  Want to target similar P/E ratios or better, but this has a lower bar.  Really used mainly for overly high current allocations or used when a stock is highly valued.  Summary: Value Trading is the process of rebalancing a portfolio using valuation specifically to adjust the weightings of your individual stocks. I value trade to optimize the performance of my portfolio, increase returns, and reduce risk.