To Trim or Not to Trim
Welcome to this week's edition of Reflections. Before we get started, we’d like to take a moment to thank you for the incredible support on our recent posts. In just under 2 months, we’ve gone from 0 to 400 subscribers! The growth has been fantastic, and we truly appreciate it!
Trimming positions is a crucial aspect of portfolio management, yet it's often overlooked or misunderstood. Let's explore the nuances of this strategy, how some of the most successful investors approach it and what we personally think about the subject.
The Trimming Dilemma
Trimming refers to the process of reducing a position in a stock that has grown significantly. Trimming positions can serve several purposes:
Risk management: Reducing exposure to a single stock or sector
Rebalancing: Maintaining desired portfolio allocations
Profit-taking: Locking in gains on successful investments
On the flip side, there are compelling reasons to avoid trimming:
Tax implications: Realising capital gains can lead to hefty tax bills
Missed opportunities: Selling too early can mean missing out on further gains
Transaction costs: Frequent trading can eat into returns
So the question remains: what should you do when a position has significantly appreciated?
Wisdom from Investment Legends
Let's examine how some renowned investors approach the trimming question.
Peter Lynch's Perspective
Peter Lynch, the legendary manager of Fidelity's Magellan Fund, had a nuanced view on trimming. He believed in letting winners run, famously stating,
"Selling your winners and holding your losers is like cutting the flowers and watering the weeds."
—Peter Lynch
However, Lynch also advocated for periodic portfolio reviews and adjustments. He emphasised the importance of understanding why a stock has appreciated and whether the original investment thesis still holds. Lynch suggested trimming when a stock's story has changed or when it no longer represents good value relative to its prospects.
Charlie Munger's Approach
Charlie Munger, Warren Buffett's long-time partner, took a more conservative stance on trimming. He emphasised the importance of holding onto great companies for the long term, stating:
"The big money is not in the buying and selling, but in the waiting."
—Charlie Munger
Munger's philosophy aligns with the idea of finding exceptional businesses and holding them through market fluctuations. He believed that frequent trading often leads to suboptimal results and increased costs.
The Way We View Trimming
At Schwar Capital, we view trimming as a tool, not a strict rule. Investing is dynamic, and we don't adhere to rigid guidelines for when to trim or hold. As the great investor Philip Fisher said, "If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never." Yet, even Fisher recognised there are times when selling makes sense.
We believe these moments can be identified by answering key questions such as:
Has the investment thesis changed?
Is the current valuation justified?
Does the position size align with your risk tolerance?
Are there better opportunities elsewhere?
Portfolio cash flows also play a role in our decisions. When cash flows are strong, we’re more inclined to let winners run since fresh capital can be allocated elsewhere to maintain balance.
Ultimately, trimming requires a clear strategy and a long-term perspective. The message we are trying to hit home here is that successful investing isn’t just about picking the right stocks—it's about managing them effectively over time.
If you’re interested in the types of companies we invest in, check out or most recent portfolio update here:
We hope this post has been insightful. If you found it valuable, feel free to share it, and stay tuned for our next edition!
Have a great rest of your week,
The S.C. Team
Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions.