How Do Investors Know When It’s Time to Rebalance Their Portfolio?

The Investment Landscape is Shifting Beneath Your Feet

Ask yourself, is your media diet smart enough to keep you ahead of the pack?

Founded by a team of former investment bankers and scholars, The Daily Upside is a (completely free) newsletter designed to help investors get smart on the thematic trends and events shaping the business world.

It’s trusted by over 155k readers — including executives at Blackstone and Goldman Sachs, for good reason: it’s crisp, witty, insightful, and treats your time with respect.

Sign up for free here , unsubscribe anytime.

Jason Hall: I look at this as an example, and I want to be clear here, I’m not calling out Microsoft as a company that I necessarily think is overvalued, but today Microsoft trades for almost 15 times sales. That’s over the past decade, that multiple has just gone up and up and that correlates largely with its share price increase, I think that’s important.

Guess what though? Its operating margin has also largely gone up over the same period. Is as it’s built up its cloud services business. It’s moved more to software-as-a-service and less selling boxes of software and then having an upgrade cycle. There are reasons that that’s gone up.

But at the end of the day, if you stretch this out. Let me pull the operating margin number off, its operating margin has been relatively high in the past. But where’s the truth of the valuation, is what I’m trying to figure out, for this 40-year-old company, where is the value really, and is it going to be here or is it going to be closer to eight to 10 times?

That concerns me because we’ve seen a period of time where some of these highly valued companies that were very large and very profitable have gone through this. This is an extreme example with Microsoft. This is from the end of December 1999, late 1999, the stock hit its all-time high. Over the next four years, Microsoft grew its revenue 76%.

Earnings were down for a while, this is going through the recession of the early 2000s. But at the end of that period its earnings were higher, its revenue was way up, the stock price was still down by half.

I’m not making any predictions, guys. I want to be clear. I’m not making any predictions at all. But how long is the market going to continue to view Microsoft as being worth 15 times sales. Even as it continues to grow sales and earnings at the rate that it’s at as large as it is. What’s going to look like in five years?

I start thinking about the larger market, those indexes with the Microsofts and the Amazon s and the Apple s that carry so much of the weight of the index.

If at some point the market is not going to value them at these high multiples, it’s going to weigh on the broader market, and it’s going to affect the multiple that people are going to be willing to pay for CrowdStrike , too, at the end of the day. If they’re not going to pay a premium for Microsoft, they’re not going to pay a premium for Zoom , Zscaler , a lot of these other great businesses that we love.

I’m just being meaningful and thoughtful about that and the last thing I want to say on this is. I know I have said a lot already, but I just want to say this. It’s got me thinking about something that I heard Tom say earlier this year and it’s one of the biggest questions that he continues to try to figure out how to answer.

That’s when you have companies you own and love, they continue to do wonderful businesses, that you’ve invested in for a very long period of time, and it’s been a magnificent winner for you, life-changing results. It gets to the point where it now makes up a meaningful portion of your net wealth.

The numbers that Tom put out there is like it’s 20% of your net worth. Not 20% of your retirement account, but 20% of your entire net value. Then do you have to start thinking, even if I love this business, even if I like its prospects going from here, I have to start thinking about how unforeseen circumstances could affect my quality of life, could actually harm me materially from here.

I think a lot of investors really need to be […]

source How Do Investors Know When It’s Time to Rebalance Their Portfolio?