Trading around a Core
Trading around a core is a strategy that I have been using for the last several years. Below, we will explore it in greater detail.
Trading around a Core
Trading around a core, simply put, is the practice of tactically increasing and decreasing the size of a particular holding, whilst always keeping a core allocation for the intended holding period.
I have said previously that the best names to add in a downturn are ones you already own. The reason is this: you already know them well, you have conviction, and you know which levels are interesting and which are not. Conversely, if they start to run really well in an uptrend, then the opposite applies. This is where my 'trading around a core' concept comes in.
A recent Example with a portfolio holding
I initiated a position in Harrow Inc. (HROW) in mid-July with a roughly 3% weighting and an average cost in the high 34s. My goal was to build this into a 4% allocation- my target 'Core' position.
After earnings on the 12th of August, the stock fell as low as 29 despite strong earnings and guide. I reasoned that a multiple of 12 times projected 2026 earnings (or 9 times 2027 earnings) was too low a multiple for a company expected to more than quadruple its earnings in the next few years. This reasoning, combined with technical support, gave me the confidence to increase the position. I added reasonably heavily that morning with tranches at $30, taking the position to a ~4.4% weighting at cost. This allowed me to reach my target number of shares for a 'Core' position, plus some additional shares for trading.
Two days later, on the 14th of August, the stock rebounded to $39.00. The 4.4% position had now become closer to a 5.7% position. I then took profits on most of the new shares to trim the position back to my 4% core size.
This is trading around a core.
Benefits and Drawbacks of Trading around a Core
The main benefit of 'Trading around a Core' is that being in tune with a stock's fundamentals and price action makes it easier to identify dislocations or anticipate significant moves. This allows me to add shares at attractive valuations or support levels and then sell them when the stock becomes extended. As a result, I can generate profits and grow the account whilst still holding my core. This strategy also satisfies the 'itch' to be active in the market without touching my core position.
Since adopting this strategy, I have been able to improve my P&L drastically.
On the other hand, one of the main drawbacks of 'Trading around a Core' is that it does not work well in taxable accounts, as you would be constantly accruing Short-Term Capital Gains. Therefore, this strategy works best in a non-taxable account. As I am based in the UK, I personally use this strategy in my non-taxable account, the Stocks and Shares ISA.
Thank you for reading, ensure to subscribe to the plan that suits and see you for the next one!
good post. i think dynamic position sizing based on r/r is critical for active investors looking to outperform. buy and hold is OK... but then might as well index
I really like this idea because if it is a core holding then your knowledge base would be deep for that stock. So you are leveraging your deep knowledge for both short and long investing opportunities.