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I am at the point that I have too much of them on a percentage basis for my portfolio.

I could just dump a portion and my precentage would be fine. But, I do not want to miss a nice upside movement on them.

On the other hand, there are quite a few stocks that could make more that they will.

They are equally in tax/tax deferred accounts.

Do you think a valuation model would be helpful to me?


Hi RunTex,

Welcome aboard!

While I can't give you specific advice about your stocks, we discussed a similar situation over at Stock Advisor a couple of issues ago, with the runup in Netflix that had lead to a similar overweighting for many people, including me.

In general, we advise that you should be able to sleep at night with your investments. If a position is getting too large where you begin to worry about it, it's probably time to trim back to something you're more comfortable with. As for worrying about missing out on further gains, believe me, I understand that too. I sold 2/3 of my Netflix position at about $140 or so, so I've given up about $50 of upside since then on those shares I sold. What's worked for me is that I was able to put the money to work elsewhere where it's doing well (though maybe not as good as the Netflix has done since). I also have some shares remaining, so I didn't give up all the upside. Finally, I've realized that such a feeling is based on fear (fear of missing out, that is), and emotions have no place in investing decisions. Just consider if you let that fear drive your decision and then the stocks tank (which they could). You'd feel even more terrible for not having sold some at a good profit. There's nothing wrong with lightening a position down to the point where you feel comfortable again, especially if you have another place for the money.

As for valuation, that comes more from an understanding of the company than it does from plugging numbers into a spreadsheet. Before you can do the latter, you've got to learn what makes a company tick, what drives its revenue, earnings, and growth prospects. From that, you can build a valuation model. Better yet, build several with different sets of assumptions, because no one model is going to get it right. Last February, I valued Netflix at anything between $38 and $120 (or thereabouts), at a time when the shares were trading at $60, just by changing some of the growth and margin assumptions. Today? $190. I thought I had the possibilities pegged and the company and the market blew past my most optimistic scenario without breaking a sweat.

Study the company, learn what makes it tick. Then build a valuation model (or two or five) but know that you'll probably be wrong one way or the other. The exercise is good because it forces you to think about the company and the business, but don't expect to be right on the model(s).

If you have any questions about the MUE valuations, ask away.

Cheers,
Jim
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