Integrated Trading and Portfolio Management
Experienced trading contributes to overall performance. Due to low liquidity in small-cap companies, one often finds a wide spread between what a stock can be purchased for and what it can be sold for. Trading without patience and skill could potentially cause major price swings resulting in lower returns. First Wilshire has an in-house trading desk that enables us to control our trading activity and act swiftly on investment decisions.
First Wilshire addresses the liquidity issues with the following techniques. First, we keep portfolio turnover low. Secondly, we accumulate and distribute shares of larger positions over a longer interval, taking advantage of periodic price swings. Third, we monitor trading volumes closely for indications of turning points in a company’s fortunes. Most importantly, knowing our companies well gives us the conviction to buy when others sell.
Portfolio management means different things to people. We think it means maximizing returns while working to minimize risk and preserve capital. Whether it is tax considerations or cash additions or withdrawals, we strive to achieve the best returns possible.
Our portfolios are not weighted by specific industry sectors and often have greater concentrations in individual issues or industry groups than found in major indices. We seek to discover emerging industries that are currently not included in popular indices.
Preservation of capital is an important component of any investment strategy. To this end, First Wilshire employs various techniques to mitigate risk. In individual accounts, for example, we will typically hold less than 10% of the portfolio in any single issue. Depending on market conditions and account size, this percentage may vary. We seek portfolio companies that have characteristics consistent with lower risk levels:
1. The companies are value stocks; that is, they trade at low price to earnings, price to book value, and/or price to cash flow.
2. They have low debt levels and therefore can better weather industry and economic downturns.
3. Their insider ownership is high enough to align management’s interests with shareholders’.
4. They are seasoned; they have been in business and publicly traded for many years.
Maintenance Research and When to Sell
Our work does not end after we decide to buy a stock. We continue to research our holdings and monitor our assumptions. This includes reviewing financial reports, participating in analyst conference calls, and interviewing management. Quarterly reports present an opportunity to update our models and calibrate whether we were right or wrong and why.
The decision to sell a stock is usually driven by deteriorating fundamentals or a strong run-up in the stock price. By staying close to our companies, we strive to recognize deteriorating fundamentals before others do and sell or reduce our holdings. While First Wilshire is generally a long-term holder, we are not afraid to reduce our position as valuations inflate or if our investment thesis no longer holds true. Sometimes an industry or a company becomes “hot” or investors recognize a previously obscure security. In those cases, the company’s valuation ratios expand and it can become overvalued. Selling a stock is often not the end of the story, as we continue to follow the stock and may buy it again if its valuation falls to our desired levels.
Table of Contents