Terry Smith criticizes UCITS regulations that impose a hard 10% cap on any single stock holding. This rule forces him to sell his best-performing stocks simply because they have appreciated, which he views as counterproductive and unfriendly to investors. He feels 'worried that my biggest stocks will perform well'.
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Terry Smith shifted away from some tech holdings because the race for AI and hyperscale data centers is transforming them from capital-light to capital-intensive businesses. This fundamentally changes their financial profile, threatening the high returns on capital that made them attractive investments in the first place.
Tim Guinness's firm uses 30 equal-weighted stocks to diversify risk. This forces a "one-in, one-out" policy, compelling the team to sell their least-favored holding to add a new one, thus overcoming the common investor weakness of being poor at selling.
Market-cap-weighted indexes create a perverse momentum loop. As a stock's price rises, its weight in the index increases, forcing new passive capital to buy more of it at inflated prices. This mechanism is the structural opposite of a value-oriented 'buy low, sell high' discipline.
A skilled investor avoided a winning stock because his Limited Partner (LP) base wouldn't tolerate the potential drawdown. This shows that even with strong conviction, a fund's structure and client base can dictate its investment universe, creating opportunities for those with more patient or permanent capital.
When a small, speculative investment like crypto appreciates massively, it can unbalance an entire portfolio by becoming an oversized allocation. This 'good problem' forces investors to systematically sell the high-performing asset to manage risk, even as it continues to grow.
Terry Smith contends that passive investing is mislabeled. It's a momentum strategy that forces capital into the largest companies regardless of valuation. With over 50% of AUM in passive funds (up from <10% in 2000), this creates a powerful feedback loop that distorts markets more than the dot-com bubble ever did.
The goal of diversification is to hold assets that behave differently. By design, some part of your portfolio will likely be underperforming at all times. Accepting this discomfort is a key feature of a well-constructed portfolio, not a bug to be fixed.
The sign of a working diversification strategy is having something in your portfolio that you're unhappy with. Chasing winners by selling the laggard is a common mistake that leads to buying high and selling low. The discomfort of holding an underperformer is proof the strategy is functioning as intended, not that it's failing.
Collateralized Loan Obligations (CLOs) have a structural covenant limiting their holdings of CCC-rated (or below) loans to typically 7.5% of the portfolio. As more loans are downgraded past this threshold, managers are forced to sell, even if they believe in the credit's long-term value. This creates artificial selling pressure and price distortions.
Despite widespread complaints about a lack of liquidity, LPs in an a16z fund unanimously rejected the opportunity to sell shares in top portfolio companies like Stripe. This reveals that LPs want to ride their winners and only seek exits for their less promising investments, creating a fundamental market mismatch.
