A wallet in the wallet

Last year, I sold a lot of overvalued US positions to reallocate them to less expensive stocks, particularly in Japan. At the same time, I also diversified my assets, drawing inspiration from from Browne's Permanent Portfolio and Mebane Faber's research. Finally, I have recently introduced a capital protection procedure with a stop order system. All these measures have helped increase the performance of my portfolio, while reducing risk.

That being said, they also had the consequence of leaving me with a fair amount of cash. In fact, I sold stocks that had increased in value over the years and, as a precaution, I preferred to split each of these positions into several other new investments. The risk represented by McDonald's, for example, cannot be compared to that of a Japanese small cap. This therefore means that I had to look for a significant amount of new stocks. Even if I found many candidates in the land of the rising sun, not all of them met my investment criteria. Add to that a few sales caused by stop losses at 20%, dividends that continue to come in, my savings, and that was all it took to find myself sitting on a good sum of cash.

Having cash on the side is certainly very useful, because it allows you to draw when the market collapses. However, this moment can sometimes take many years. In addition, a large portion of cash weighs on the profitability of a portfolio in the long term. So I racked my brains for a while to figure out what to do with this excess money. During my questions, I came across an "old" book in my library, O'Shaugnessy's "What works on Wall Street", which inspired the solution.

Today, as in the past, I use a number of criteria to select my stocks. These are intended to focus on profitable, cheap companies that offer growing dividends. I start by searching for candidates using several screeners, then I obtain a short-list, then I analyze in detail each company that composes it. In the end, the papables are rare, and that's very good. This assures me that I have all the chances on my side with what I have found.

That said, O'Shaugnessy has proven that you can also build very high-performing portfolios based on a very small number of criteria and renewing them mechanically once or twice a year, a bit like the famous Dogs of the Dow. So I took my research a little further and built a small portfolio of stocks based on this principle.

This now coexists with my other securities, selected in a more traditional way. The securities that compose it are for the most part outside my usual investment framework (increasing dividends). Thanks to them, not only am I able to partially deflate my cash reserves, but I am also diversifying my strategies, which is a good thing, particularly in terms of risk. Of course, some of these securities do not pay dividends at all, which is obviously not optimal in relation to financial independence objectives, based on an annuity. Nevertheless, it is still less worse than a large cash position, especially since the securities obtained by this strategy are all undervalued, whether from the point of view of profits, sales, free cash flow, book value or all these mixed criteria. They therefore all have a strong potential for capital gains, which can be reinvested later in increasing dividend payers.

Here is the current status of this miniportfolio, which represents approximately 10% of my overall portfolio:

To build this portfolio, I have several different screeners that provide me with stocks based on their valuation, quality, and momentum. The goal is to take a position on each stock released by the screeners, then hold them for six months. If they are still in the screeners, then we keep them for the next six months and so on. Otherwise, we sell them. I only exit the position along the way if the price has crashed by more than 20% (according to stop loss procedure). We replace the titles that are sold with the new ones that appear in the screeners.

It is still too early to draw conclusions, of course, but some of these positions have already shown very nice capital gains in a short time. It remains to be seen whether this good performance is confirmed over time. This should be the case given that the indicators used have all proven their effectiveness according to the various research studies.