Spring-Cleaning Your Portfolio

In today's MarketFoolery show, host Chris Hill talks with Fool 100's Tim Hanson about rebalancing portfolios, when to sell, and some travel advice for your next vacation. Find out a few reasons it might be best to hold on to a stock, even when it seems like a total dud; when selling a stock can work for you; exactly what the Fool 100 Index does and how it's done lately compared to the S&P 500, as well as how and when the Fool 100 is reconstituted. Also, they offer one piece of advice you won't regret following when you're out exploring the world.

A full transcript follows the video.

This video was recorded on March 26, 2018.

Chris Hill: It's Monday, March 26th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, investor at large Tim Hanson. Happy spring break!

Tim Hanson: Yes.

Hill: We're taping this early. Spring break this week, we're out of the office this week. We'll get to where we're going. Not together.

Hanson: No.

Hill: We're going our separate ways.

Hanson: Although, that might be fun.

Hill: That could be fun.

Hanson: That could be fun.

Hill: Depending on which of the two locations --

Hanson: And not if we're going where you're going.

Hill: [laughs] -- which we'll get to. But, I wanted to start with -- we've talked about this concept before at the office, but we haven't done it in a long time on MarketFoolery. Along with spring break, the other thing that goes with spring break is spring cleaning. And I wanted to get a little bit of insight into how you look at your own portfolio, because there are people I know who, when they look at their portfolio of stocks, they have a system for when they look to rebalance it, when they look to evaluate what's worth holding, what's worth selling. And for some people, it's like clockwork, it's every month. Some people, it's quarterly. Some people are much more engaged, and they're constantly looking at what they have vs. their watchlist. Without getting too personal --

Hanson: I'm an open book, Chris.

Hill: [laughs] -- how do you think about spring cleaning in terms of your stock portfolio?

Hanson: For me, for the last couple of years, I have not sold anything. I don't sell. And there are a couple of reasons for that. Figuring out when to sell is hard. And plus, as someone who's trying to regularly add new money to my portfolio, I find that it's a lot easier to rebalance simply by allocating that new money into either sectors or types of stocks that I think would make my portfolio better reflect my worldview, than by reallocating money around, because that has two consequences. One is commissions, and the other, which I hate, is taxes. And it's not even the paying of the taxes, it's remembering all the transactions and filing them when it comes times for taxes. I just realized, the bang for the buck is just not here. I'm not that good at selling and it creates a lot of work, so I'm just not going to do it anymore.

Hill: So, wait a minute. This is interesting to me. Not the admission that you're not good at selling --

Hanson: Well, nobody can be that good at selling, because most things over time go up. 

Hill: And Tom Gardner, co-founder of our company, he's made the point before, running the numbers, he would have been much better off if he had never sold anything. Even the losers that end up going, if not to zero, they go to some tiny amount where they're insignificant. But I'm curious about the never selling, not so much in terms of the timing, but in terms of businesses going south. The last thing I sold was Chipotle, because I just got fed up.

Hanson: Sure.

Hill: I just got angry.

Hanson: I might have broken my rules for Chipotle, too.

Hill: To the point where I was just like ... it's not me, it's you, and we have to break up right now.

Hanson: To be fair, I did sell something last year, and the reason I sold it is because it had been an abject failure, and I sold it to harvest the loss, because I had distributed gains from a mutual fund that I hold. So, rather than pay taxes on those, I did sell to offset that. That's the nice thing about keeping even disasters around, because you can tactically unload them to offset taxes, which is a nice thing to do.

Hill: That's true.

Hanson: That's making lemonade out of lemons right there. I mean, knock on wood, I haven't had that many abject disasters, so I haven't encountered that scenario quite so many times.

Hill: In some ways, if there's a silver lining to abject disasters, it's that it makes the decision process a little easier. It's tougher when you have a stock that's just plodding along to the extent that you're thinking about selling it and you're like, "I don't know, do I sell this thing? Do I just ride it out?" 

Hanson: I mean, yeah, as long as it's a good company, you look at it and go, its time will come. I've owned 3M for, gosh, probably 15 years at this point. And there was a period of time where it was just kind of sitting there, not doing much. But, you annualize what it's done over the last 15 years, it's been solid, and it's always been a good business. It's funny, the abject failure I had that I sold at the end of last year was a company called Female Health, which had gone through a variety of restructuring and had become a very small percent of our portfolio. I had stopped following it and became disinterested. And I looked at my portfolio one day to look for things that I could sell at a loss, and the stock had changed its name and business model. And I looked, and I was like, what is this thing? How did it get here?

Hill: Did they add blockchain?

Hanson: Well, no, then it might have gone up. I forget, they bought some cosmetics company or gel company or something like that. Anyway, that was a little bit of a surprise. I was a little embarrassed that I had no idea that it had happened. But at the end of the day, it is what it is.

Hill: You probably weren't the only one caught off guard by that.

Hanson: I don't think so. It was awkward for all of us. [laughs] 

Hill: So, in terms of adding new money and adding to your portfolio, what is your watchlist process like? Do you have a watchlist where you say, OK, I'm going to pick from this list? Or does it just depend on the timing of when the money is available?

Hanson: I mean, my job entails me looking at stocks every day, and the job that I do now at The Fool has me looking at a database of all of our stocks all the time, so it's interesting to watch how that plays out. We have algorithms that rank them, I think that's kind of fun. So, I try to eat my own cooking in that regard by keeping a watch list of things that the algorithms like that, obviously, Fool analysts like as well. The last thing I bought -- and, I've been slow to add money just because there haven't been a ton of things that look super compelling to me -- but, a company called Square that makes payment technologies.

Hill: The war on cash. We love the war on cash.

Hanson: From a big-picture standpoint, I think that's a very compelling story. Then, Square was a company that, in our ranking algorithm, because a lot of Fool analysts had either started positive positions in it or increased their positions in it, the algorithm liked it a lot. When I looked at the business model and read about it, it seemed like a fascinating company with a really interesting space. So, that's the last thing I bought.

Hill: Speaking of what you do here at The Motley Fool, The Fool 100 index --

Hanson: What is it I do here?

Hill: What exactly is it that you do? The Fool 100 index, which, for those unfamiliar, an index of 100 stocks from The Fool universe. Which, if you go to fool100.com, you can learn more about the index. It's also right there on the main page of fool.com, because we have it right next to the S&P 500. As of this taping, running ahead of the market, year to date up by about 5%.

Hanson: Yeah. So, it's harder to beat than the S&P 500. This year. [laughs] This year.

Hill: Early in the year. Early in the year. Over the last 12 months, though, up about 26% vs. the market --

Hanson: We do get into back-tested returns, there. But, this year, all live, all published returns.

Hill: Recently rebalanced. What is that process like?

Hanson: The index reconstitutes quarterly, which means we take stock of what's in The Fool universe again, and then we rerank everything by market cap, so it's the 100 largest Fool buy recommendations is basically what's in The Fool 100. We just finished the reconstitution process. Six things went in, six things went out. Four of those things came in and out because of market cap reasons. Four things got smaller and four things got bigger. Two things went out because they were sold by our analysts. One was Paccar, which is a truck maker, and the other was Emerson Electric, which is an industrial electronics company. 

And the two that came into the universe were Red Hat, which is an open-source technology company, and Discover Financial Services, which is Discover card and consumer lending and things of that nature, both of which have shown up in our database among the top 150 ideas that our analysts liked. So, the index is substantially the same as it was a couple of days ago. Those changes don't go into effect until the close of business on Thursday or open on April 2nd. But, substantially the same, low turnover, most of the stocks we liked last month are still the stocks we like, which is consistent with The Foolish way of thinking.

Hill: And this goes on, the rebalancing will happen quarterly -- what do you do in the case of an acquisition? If something gets acquired mid-quarter or that closes mid-quarter, do you just say, not in name, but in practice, it's going to be The Fool 99 index for a few weeks?

Hanson: Yeah, exactly. It depends on, obviously, our positions can close in a lot of different ways. You can get proceeds. You can get shares of something new. If we get shares of something new, it may not be a Fool recommendation, right, but it might be in the index as a result of that corporate action until the next reconstitution.

Hill: And then you get a new name, like with Female Health.

Hanson: [laughs] It's funny, when we write up the methodology for how you maintain an index, all these little quirky points come up. It's all at fool100.com you can read about how we handle each one of those kinds of unique situations. But ultimately, at the end of the day, we keep it pretty simple.

Hill: Spring break, you're going to Nicaragua.

Hanson: Yeah.

Hill: I'm going somewhere less exotic, a little place I like to call Central Pennsylvania.

Hanson: Nice.

Hill: [laughs] So, not as exotic as Nicaragua.

Hanson: It depends on which part of Central Pennsylvania you're going to, perhaps.

Hill: That's true. Although, I do think, the one practice that you taught me about when traveling I think applies whether you're in Nicaragua or Central Pennsylvania, or anywhere, for that matter, anywhere you're traveling, and that's the standing in line with locals.

Hanson: Yeah. If you see a line, stand on it, in it, at the back of it, do something. [laughs] 

Hill: Yeah. If you're traveling and you're hungry and you see a line somewhere, particularly if you're not in a tourist area, or even if you are in a tourist area and you see a lot of local people, get in that line, because the locals know.

Hanson: The origins of that actually come from when I was in Singapore and we were at a hawker stall, and there was a stall that was closed.

Hill: Wait, a hawker stall?

Hanson: They have these big food halls, and then there's individual stalls within the food hall. And some of them are quite famous. There's a gentleman there who just got a Michelin star for his stall.

Hill: Really?!

Hanson: Yeah.

Hill: That's impressive.

Hanson: Very. With that as background, we had gone to one of the more famous food halls and done a little bit of research, apparently not all the research. So, we're eating our lunch, and there's a stall that's closed. It's 12:30 and it's closed. Then, all of the sudden, somebody stops in front of the stall and starts standing there. Within about 10 minutes, the line goes 20 people deep. And this thing is closed, and it has no signs of opening up, there weren't hours on it. So, I just said to my travel companion, I was like, "I'm going to go stand in that line." And he was like, "Why? You don't even know what they do there." And I was like, "That's true, that's true, but I'm going to go stand there." And it turned out to be, I believe, if I recall correctly, it was rice pudding and it was delicious. Delicious.

Hill: The locals know.

Hanson: They know.

Hill: [laughs] My favorite part of that story is that you just decided, you saw the situation and you were like, "I'm going to go do that. They know something I don't, and I'm just going to give myself over to that." My second favorite part is that there was no indication whatsoever.

Hanson: You had to know.

Hill: It's not even like, "Hey, it's the rice pudding stall," or it's a little sign tacked up, "Back in 10 minutes." No.

Hanson: And I think they had a limit, you could only buy four, and I think the guy who was maybe 10 or 11 spots behind me got the last, because I was the only person in line who only got one. Everybody else was maxing out. And I thought about maxing out, too, and I was like, "Ah, I'm not going to eat four rice puddings."

Hill: No, but you take advantage of the secondary market.

Hanson: [laughs] Securitize that.

Hill: [laughs] What's one thing in Nicaragua that people should do when they go there?

Hanson: I've never been, so I don't know.

Hill: Oh, you've not been, OK.

Hanson: I don't know. We're pushing the envelope. We've done Costa Rica. I love traveling Latin America for a variety of reasons. People are very friendly, the food is always delicious, there's lots of good hiking, wildlife, things of that nature. I have passable Spanish. It's warm, it's spring break. Which, a lot of the world isn't warm on spring break. [laughs] 

Hill: Right.

Hanson: But, we've done Costa Rica in the past, we've done Panama in the past. We're going to hit Nicaragua, hopefully get some surfing and teach the kids how to surf.

Hill: Nice.

Hanson: That's the plan.

Hill: I don't think there's going to be surfing in Central Pennsylvania.

Hanson: Is there one of those indoor water parks? Because those standing waves are pretty cool.

Hill: You know what? Next time we're in the studio we'll compare notes.

Hanson: Should we bring pictures? [laughs] 

Hill: [laughs] Well, it's an audio podcast.

Hanson: We can describe them.

Hill: Yeah, that's not so great. To learn more about what Tim Hanson does, go to fool100.com, and you can see about the index, which just got rebalanced. fool100.com. Thanks for being here, Tim!

Hanson: Thank you, my man!

Hill: Have a great trip!

Hanson: Thank you!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Taylor Harris. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!