Concentrated vs. Collector
Fighting my natural tendencies to win in the stock market + My Top 12 Stocks and a Little Known Tax Rule
The Collector’s Gene
From a mischievous collector of jewelry as a young child to my recent stint with stocks, I have been plagued with the collector’s gene for most of my life.
At age 7 or 8, my best friend and I snuck around our houses, pilfering jewelry and antique artifacts small enough to fit in a small baseball card box. We would stare at the contained treasures and marvel at our prowess for the finds. Of course it all came crashing down when our parents found out (sorry about that mom and dad), but thus began my collector’s itch… albeit only through legal means moving forward.
Soon I used the baseball card box to actually collect baseball cards…
Then moved on to pogs in middle school…
Then Magic the Gathering in high school…
Later on in life I collected books and movies and Funko Pop figures. So I guess it was only natural for me to begin investing and start collecting my favorite stocks. Of course with each collection I hit a realization point that allowed me to step back from the accumulation of all those items, especially when it became too much.
With the recent tech stock pullback, I hit this realization point. As much as I enjoyed the 60+ stocks that I owned and the 10-20 stocks on my watchlist… it was definitely in that too much category. And it also didn’t matter what industry they were in because they all pulled back sharply.
Peter Lynch was well known for holding many stocks in his Fidelity Magellan fund, but in his books he also discussed how he would scale into positions with size like Chrysler when they came out with the mini-van, Hanes when they came out with L-eggs, and a new hotel chain called La Quinta. He might have had over a 1000 stocks in the portfolio, but I’m pretty sure he was highly concentrated in his top tier stocks, driving his amazing results over the years.
So my focus over the coming months is to transition to a concentrated portfolio of no more than 25-30 stocks where the top 12-15 contain 75% or more of the total portfolio. This will force me to be more patient with my purchases, more patient with my research, and use position size to mitigate riskier investments.
For instance, on a previous newsletter, I discussed the company Fathom Holdings (Ticker: FTHM). They are a small company with a market cap of $530 million, and TTM revenue of $154 million. Due to their size and risk, I will only hold on to a 1% position within my portfolio. This is versus another of my holdings, Redfin (Ticker: RDFN) that is a $7.7 billion business with TTM revenue of $780 million. I have much more confidence in RDFN, so I am comfortable holding a full position in the company of anywhere from 5%-8%.
Side note: I am beginning to reconsider my ceiling position size of 8%. To hold a more concentrated portfolio, I might potentially increase that ceiling to 12%.
Once I get down to my ideal portfolio and processes, I will share all of my buys/sells for that portfolio with this newsletter. But for now, here are my top twelve.
Current Portfolio Top 12
Redfin (Ticker: RDFN)
Draftkings (Ticker: DKNG)
Pinterest (Ticker: PINS)
Sea Limited (Ticker: SE)
DocuSign (Ticker: DOCU)
MercadoLibre (Ticker: MELI)
Chewy (Ticker: CHWY)
GoodRx (Ticker: GDRX)
Crowdstrike (Ticker: CRWD)
Nvidia (Ticker: NVDA)
Roku (Ticker: ROKU)
The Trade Desk (Ticker: TTD)
Conviction Stock Highlight Tweets
GoodRx Holdings (Ticker: GDRX)
The Little Known Long Term Taxable Income Capital Gains Tax Rule
Try saying that title five times fast. While many people know the short versus long term capital gains tax rule, not many people know the long term taxable income capital gains tax rule. Both are covered briefly below:
Short/Long Term Capital Gains Tax Rule: If you sell your stock within a year, then any profits made on that stock will be taxed at the normal income tax rates. So if you bought a stock at $30, and then sold it within a year for $100, then the profit of $70 will be taxed at the normal income tax rates (see the tax brackets by clicking here). If you hold that stock for more than a year, then they will be taxed at the long term capital gains tax rates, which is 15% for most individuals.
Long Term Taxable Income Capital Gains Tax Rule: If your taxable income is less than $40K as an individual or $80K as a married couple, then you could potentially pay 0% in long term capital gains taxes. What’s also amazing is that you also have the $12K deduction as an individual and $24K as a married couple. This means that an individual could have 0% in long term capital gains if their taxable income was less than $52K and a married couple would too if their combined taxable income was less than $104K. For instance, if a married couple made $80K in total income from their salaries, then they could sell stocks with profits of $24K and pay 0% in long term capital gains taxes on that $24K (long term is holding the stock for one year and one day or greater)
The second rule is extremely important for my wife and I, especially if we choose to retire early. This means that we could sell our long terms stocks with profits up to $80K and pay no taxes on those profits if we have no other taxable income. We could also have a salary of $24K that would be tax free because of the standard deduction.
Of course there are always caveats to these rules, because they never make anything super simple, so we will be consulting a professional prior to making any decisions. And you should too for your personal situation!
Side Note: Check out this article from nerdwallet. It has a capital gains tax rate calculator at the bottom, although the calculator doesn’t include the standard deduction.
Thank You!
If you’ve made it this far, then you are an amazing human. Let me know what you think by leaving a comment. Or drop me a question. Share it with others who you think might appreciate the information. Looking forward to sending out the next issue!
**I am not a financial advisor, so please don't buy/sell anything based solely on what you read here and do your own due diligence.