A Lesson on Portfolio Allocation & Trimming
And a look into Dick Capital’s current trading portfolio and the secret behind its +201.5% YTD performance
You Don’t Need to Full-Port When You’ve Got Dick Capital
If last week taught us anything, it’s that a lot of folks are not sizing their positions properly. Too many people are trying to make a quick buck and instead end up getting folded. As mentioned time and time again, Dick Capital firmly believes that money is made in holding. For every Sir Jack, Longwashere, and Steve Zissou you see, there are 99 stories where someone lost everything they ever had. You just don’t hear about those stories. Here is the reality: there is no free lunch in the capital markets. Here’s another reality: with the returns Dick Capital yields, you really don’t need options. For those who missed the recap post, the average Dick Capital stock pick over the past 16 months peaked at +214%. That is across a sample size of 34 and assumes equal weights. With that kind of alpha spread across so many holdings, do you really need to go full-port or mess with risky options?
Dick Capital’s Take on Options
Dick Capital rarely touches options. We only delve into them when we really like a specific setup. Think the LDI 03/26 2c call on September 2 and the BITF 01/26 2c/5c call on September 12. Those were two of only three options plays we’ve ever given to our followers, the third being LEAPS on LDI (01/27 5c), which is currently playing out (and we believe will pay handsomely). Not to mention, we limit our (rare) options plays to less than 0.5% of the book. You have to size options to zero. You should enter the position assuming you’ll lose it all.
On that note, yes, a lot of money can be made trading options. But the reality is one we’ve personally observed for years and even been guilty of in the early days. You get a big win in options, then you bet big again and lose it. You keep cycling between wins and losses, and before you know it, years have passed and your portfolio is still flat, while the nerd next to you who just kept buying SPY is up massively and you’re stuck playing catch up. And that’s the best-case scenario when trading options. The more likely one is you lose everything.
You also need to realize that different trading environments call for different strategies. My followers from AfterHour will be well aware of Sir Jack, who turned 35K into 10M without options. Instead, he was full-porting every play. But remember, he jumped in during the historic COVID crash and also rode the coattails of the insane bull run that followed. We acknowledge that there are certain environments where we can take a more aggressive approach to trading, and we will definitely jump on those opportunities as we have over the past 16 months. But we also acknowledge that there are times when we have to tone it down and play the game of patience. We hope you can acknowledge these two realities as well. In the meantime, we’ll continue to do what we’ve always done: be ahead of the crowd and continually adapt to the dynamic nature of the markets. Stay tuned for our upcoming macro outlook post.
A Reminder of Dick Capital’s Investing Approach
We conduct deep research on every position we undertake.
We know what we hold inside and out, and we come knocking well before the masses.
We buy quality companies with strong fundamentals, which allows us to rest easy during the inevitable dips as the thesis plays out.
We buy with the mindset to hold for 12 to 18 months, but if our price targets are reached sooner, we apply selective trimming strategies.
We strongly encourage shares over options so we aren’t constrained by the ticking of time.
All our words are alpha.
Bullet 4 is especially important. If you aren’t comfortable holding for at least 12 months because you need the money sooner or can’t control your ape tendencies, then you should strongly reconsider whether or not investing is for you. Corporate deals and transformations take time. This isn’t the same as running back-alley transactions behind a Wendy’s dumpster. If you struggle to understand this basic principle, find a different hobby that doesn’t involve the markets.
Trading Portfolio vs Long-Term Portfolio
Now everyone’s situation is different. Dick Capital likes to separate the trading portfolio from the long-term portfolio. We don’t touch or even look at the long-term portfolio. The time horizon for this portfolio is three to five years or more. You can consider it synonymous with a retirement portfolio, if you will.
The focus of this post, however, and one that most of you can relate to, is the trading portfolio. It’s called trading only in name. We aren’t moving in and out of positions within a day. As aforementioned, we enter positions with the intention of holding them for at least 12 months. If a price target is reached sooner than expected, we reevaluate and apply selective trimming strategies, which we’ll discuss later in this post.
Portfolio Allocation
It’s inherently tricky to make blanket statements around this concept given the number of personal factors involved, including but not limited to portfolio size, financial goals, and risk tolerance. That said, regardless of your personal circumstances, Dick Capital stands by one core principle: there’s no need to allocate more than 20% of your portfolio to a single holding. Go read the first section again if you still have to ask why.
On a separate note, beyond the obvious risk of blowing up your portfolio if a trade goes south, oversizing a position often leads to selling a winner prematurely, or “paper handing.” When that happens, you make less because your main worry shifts to protecting your overallocated capital instead of letting the trade play out. Worse yet, if the position dips shortly after initiation, you might get anxious and sell (at a loss) what could have ultimately been a very successful trade.
We started typing out examples of how someone in a given situation might size their portfolio but quickly realized it was a futile exercise. There are simply too many factors involved, and we are not financial advisors. But again, if you follow the above rule as your guiding principle, it will serve you well and keep you from getting folded.
Now, does Dick Capital ever size as high as 20%? There have been instances where we have sized that high in our relatively large trading portfolio. The most recent case was Nebius when we invested in November 2024. We have mentioned this many times before, but this was essentially a company founded by the Russian version of Elon Musk that was getting no attention and was trading for peanuts. It was the deal of the decade. We had full conviction and even considered going over 20%, but we stuck with our guiding principle. We have and will continue to discuss portfolio allocation in our posts. You saw what happened with Nebius, and we hope we get the opportunity to share more of those “20% plays” in the months to come. These plays do not come around often, and we might even have to wait a year or more, but as many of you know, the last thing Dick Capital ever does is chase or try to force a trade. Hold U.
Note: A maximum 20% portfolio allocation refers to the time of initiating or gradually building a position. Naturally, if a position performs well, it may grow to exceed 20% of your portfolio, and that is perfectly fine (in fact, that’s something you’d hope for).