Portfolio Ranking Exercise
Ranking my 21 portfolio companies based on 14 different fundamental and non-fundamental criteria
As long-term focused investors, we learn more about our portfolio companies as time goes on. I firmly believe that you need to own companies to really understand them, at least I need to. However, we must avoid the pitfalls of falling in love with our companies and falling for fallacies:
Price anchoring: I will sell it once it gets back to my purchase price
Sunk cost fallacy: I put so much money in already, now I can’t just walk away
Ignoring fundamental changes/deterioration since we first invested
To combat these issues and make reevaluating my portfolio quality easier, I want to create a process combining my experience and some numbers. I intend to evaluate all portfolio holdings at least on an annual basis. The idea is to put incremental capital towards my best ideas, not just the ones down the most. Making a ranking helps to make this easier. This could also help in focusing the portfolio. Ideally, I want to be within 15-20 companies, and while I’m close to 21, there might be options to concentrate further.
Ranking Criteria
I want to use a mix of fundamental and non-fundamental criteria to rank my companies. These criteria are meant to rank the quality of the business and NOT the valuation. I intentionally want to disconnect these two metrics. Having the highest quality score does not mean it is the best investment opportunity. Here are the current criteria I chose:
Management Quality
Management Alignment
Growth opportunities/secular tailwinds
Margin development
Balance sheet
Moat/Competition
Past growth rates
Expected sales growth
ROIC
Reinvestment rate
Capital return of excess cash
Cyclicality/Visibility
Recurring revenue
Working Capital
Each will be ranked from 1 (worst) to 5 (best) with an additional field where I write down the numbers/reasoning for the rating. This way, I have a comparison basis. While this, of course, is still highly subjective to my own biases and interpretation, I’m sure it will show a general trend towards higher and lower quality businesses. I think this selection gives a good blend of management, safety, growth potential, capital allocation and profitability. I am, however, open to adding additional criteria!