quantwise 1.2.0 → 1.2.2

package/.claude/skills/portfolio-manager/references/position-evaluation.md

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+# Position Evaluation Framework
+
+This document provides a systematic framework for evaluating individual positions within a portfolio to determine appropriate actions: HOLD, ADD, TRIM, or SELL.
+
+## Overview
+
+Position evaluation requires both quantitative analysis and qualitative judgment. This framework helps answer:
+
+1. Is the original investment thesis still intact?
+2. Is the position appropriately sized given current conviction and risk?
+3. Has the valuation become stretched or attractive?
+4. What is the expected forward return vs risk?
+5. Are there better opportunities elsewhere?
+
+## Four-Factor Evaluation Model
+
+Every position should be evaluated across four dimensions:
+
+### 1. Thesis Validation (40% weight)
+- Is the investment thesis playing out as expected?
+- Have fundamentals improved, remained stable, or deteriorated?
+- Are growth prospects intact or changed?
+
+### 2. Valuation Assessment (30% weight)
+- Is the stock overvalued, fairly valued, or undervalued?
+- How does current valuation compare to historical range?
+- How does it compare to peer group?
+
+### 3. Position Sizing (20% weight)
+- Is current position size appropriate?
+- Does it match conviction level?
+- Is it creating concentration risk?
+
+### 4. Relative Opportunity (10% weight)
+- Are there better uses of capital?
+- Would selling this improve portfolio?
+- Cost of holding vs deploying elsewhere
+
+## Detailed Evaluation Framework
+
+### Thesis Validation Analysis
+
+**Original Thesis Documentation:**
+
+For each position, document the original investment thesis:
+
+**Example Thesis Template:**
+```
+Symbol: AAPL
+Initial Thesis (Date: Jan 2023):
+- Services revenue growing 15%+ annually
+- Installed base expansion (1.8B → 2.0B devices)
+- Margin expansion from services mix shift
+- Capital return program (dividends + buybacks)
+- Valuation: P/E 24x vs historical 18x, justified by services growth
+
+Entry Price: $145
+Target Price: $180 (12-month)
+Expected Return: 24% (+2% dividend = 26% total)
+Risk Factors: iPhone demand slowdown, China regulatory risk
+```
+
+**Thesis Validation Checklist:**
+
+- [ ] **Revenue/Earnings Growth:** On track vs expectations?
+  - Expected: +15% revenue growth
+  - Actual: +12% (slightly below, acceptable / -5% (concerning))
+
+- [ ] **Margins:** Improving, stable, or declining?
+  - Expected: Expanding by 100bps
+  - Actual: Expanded 80bps (close enough / Contracted 50bps (negative))
+
+- [ ] **Competitive Position:** Strengthening or weakening?
+  - Market share trends
+  - New product success/failures
+  - Competitor actions
+
+- [ ] **Management Execution:** Meeting targets?
+  - Guidance met/beaten/missed
+  - Capital allocation decisions
+  - Strategic pivots if any
+
+- [ ] **Industry Tailwinds:** Still present?
+  - Secular trends intact?
+  - Regulatory changes
+  - Technology shifts
+
+**Thesis Status Classification:**
+
+| Status | Criteria | Action Bias |
+|--------|----------|-------------|
+| **Strengthening** | Fundamentals improving, thesis accelerating | Consider ADD |
+| **Intact** | On track with expectations, no changes | HOLD |
+| **Weakening** | Some concerns, thesis partially impaired | Consider TRIM |
+| **Broken** | Thesis invalid, fundamentals deteriorating | SELL |
+
+### Valuation Assessment
+
+**Valuation Methodology:**
+
+Compare current valuation across multiple dimensions:
+
+**1. Historical Valuation Range**
+
+| Metric | Current | 1Y Avg | 3Y Avg | 5Y Avg | Min | Max |
+|--------|---------|--------|--------|--------|-----|-----|
+| P/E | 28x | 25x | 22x | 20x | 12x | 35x |
+| P/B | 6.5x | 5.8x | 5.2x | 4.8x | 3.5x | 8.0x |
+| EV/EBITDA | 22x | 19x | 17x | 16x | 10x | 25x |
+| Div Yield | 1.2% | 1.4% | 1.6% | 1.8% | 0.8% | 2.5% |
+
+**Analysis:**
+- Current P/E (28x) near 3Y max (35x) → Expensive vs history
+- P/B elevated vs 5Y avg → Premium valuation
+- Dividend yield low vs range → Not a value play
+
+**2. Peer Group Comparison**
+
+| Company | P/E | P/B | EV/EBITDA | Dividend Yield | Rev Growth | Margin |
+|---------|-----|-----|-----------|----------------|------------|--------|
+| **[Target]** | 28x | 6.5x | 22x | 1.2% | 12% | 28% |
+| Peer A | 22x | 4.2x | 18x | 1.8% | 8% | 22% |
+| Peer B | 31x | 7.8x | 25x | 0.9% | 18% | 32% |
+| Peer C | 25x | 5.1x | 20x | 1.5% | 10% | 25% |
+| **Sector Median** | 25x | 5.5x | 20x | 1.4% | 11% | 26% |
+
+**Analysis:**
+- P/E slightly above sector median → Modest premium
+- Growth (12%) above median (11%) → Premium partially justified
+- Margins (28%) above median (26%) → Quality justifies some premium
+- **Assessment:** Fair to slightly expensive vs peers
+
+**3. Growth-Adjusted Valuation (PEG Ratio)**
+
+```
+PEG Ratio = P/E / Earnings Growth Rate
+
+Example:
+P/E: 28x
+Expected EPS growth: 15%
+PEG = 28 / 15 = 1.87
+
+Interpretation:
+< 1.0 = Undervalued
+1.0-2.0 = Fair value
+> 2.0 = Overvalued
+```
+
+**4. DCF Fair Value Estimate (Simplified)**
+
+If time permits, estimate intrinsic value using discounted cash flow:
+
+```
+Fair Value = (FCF × (1 + growth rate)^5) / (discount rate - terminal growth)
+
+Example inputs:
+Current FCF: $100B
+Growth (5Y): 12%
+Discount rate: 10%
+Terminal growth: 4%
+```
+
+**Valuation Status Classification:**
+
+| Status | Criteria | Action Bias |
+|--------|----------|-------------|
+| **Undervalued** | Below historical avg, below peers, low PEG | ADD |
+| **Fair Value** | In-line with history and peers | HOLD |
+| **Overvalued** | Above historical range, premium to peers, high PEG | TRIM |
+| **Severely Overvalued** | Extreme multiples, bubble-like | SELL |
+
+### Position Sizing Analysis
+
+**Current Position Assessment:**
+
+```
+Position Size = Position Value / Total Portfolio Value
+
+Example:
+Position value: $18,000
+Portfolio value: $120,000
+Position size: 18,000 / 120,000 = 15%
+```
+
+**Position Sizing Guidelines:**
+
+| Conviction Level | Target Position Size | Max Position Size |
+|------------------|---------------------|-------------------|
+| **High Conviction** | 8-12% | 15% |
+| **Medium Conviction** | 5-8% | 10% |
+| **Low Conviction / Speculative** | 2-5% | 7% |
+| **Starter Position** | 2-3% | 5% |
+
+**Position Sizing Risk Assessment:**
+
+| Current Size | Risk Level | Typical Action |
+|--------------|-----------|----------------|
+| **<5%** | Low | Can add if conviction high |
+| **5-10%** | Normal | Monitor |
+| **10-15%** | Elevated | Trim if conviction not very high |
+| **15-20%** | High | Trim recommended |
+| **>20%** | Excessive | Urgent trim required |
+
+**Position Drift Analysis:**
+
+Track how position size has changed due to price appreciation:
+
+```
+Position Appreciation Impact:
+
+Initial investment: $10,000 (10% of $100K portfolio)
+Other holdings flat, this position doubled
+Current value: $20,000 (18% of $110K portfolio)
+
+Position drift: 10% → 18% (increased 8 percentage points)
+Exceeded target: Yes (assuming 10% target)
+Action: Trim back to 10-12% range
+```
+
+**Rebalancing Calculation:**
+
+```
+To trim from 18% to 10%:
+
+Target value: $110,000 × 10% = $11,000
+Current value: $20,000
+Amount to sell: $20,000 - $11,000 = $9,000
+Shares to sell: $9,000 / Current Price
+```
+
+### Relative Opportunity Analysis
+
+**Opportunity Cost Framework:**
+
+Ask: "If I sold this position today, where would I deploy the capital?"
+
+**Comparison Matrix:**
+
+| Option | Expected Return | Risk Level | Conviction | Notes |
+|--------|----------------|------------|-----------|-------|
+| **Hold [Current]** | 8% | Medium | Medium | Fairly valued, thesis intact |
+| Alternative A | 15% | High | High | Undervalued, strong thesis |
+| Alternative B | 10% | Low | Medium | Defensive, lower risk |
+| Cash (wait) | 4% | None | N/A | Opportunity cost |
+
+**Decision Logic:**
+
+If (Alternative Expected Return - Hold Expected Return) > Switching Cost:
+→ Consider selling current, buying alternative
+
+**Switching Costs to Consider:**
+- **Taxes:** Capital gains (15-20% long-term, ordinary income short-term)
+- **Transaction costs:** Commissions (minimal) + bid-ask spread
+- **Opportunity risk:** Wrong about alternative, miss rebound in current
+
+**Example Calculation:**
+
+```
+Current position: Expected 8% return
+Alternative: Expected 15% return
+Differential: 7%
+
+Unrealized gain: $8,000 on $20,000 position (67% gain)
+Tax on sale (20% long-term): $8,000 × 0.20 = $1,600
+After-tax proceeds: $20,000 - $1,600 = $18,400
+
+After-tax opportunity gain (1 year):
+Hold current: $20,000 × 1.08 = $21,600
+Buy alternative: $18,400 × 1.15 = $21,160
+
+Conclusion: Tax drag eliminates benefit for 1-year hold
+Consider if: (1) Multi-year horizon, or (2) Tax-advantaged account, or (3) Can tax-loss harvest elsewhere
+```
+
+## Position Action Decision Matrix
+
+Combine the four factors to determine action:
+
+### HOLD Decision
+
+**Criteria:**
+- ✅ Thesis: Intact or strengthening
+- ✅ Valuation: Fair to undervalued
+- ✅ Position Size: Within target range (5-10% for medium conviction)
+- ✅ Relative Opportunity: No clearly better alternative after costs
+
+**Example:**
+```
+Position: Johnson & Johnson (JNJ)
+Thesis: ✅ Intact (healthcare demand, dividend aristocrat)
+Valuation: ✅ Fair (P/E 16x vs 15x historical avg)
+Position Size: ✅ 7% of portfolio (target range)
+Opportunity: ✅ No compelling alternative in healthcare
+
+Decision: HOLD
+Rationale: Position performing as expected, appropriately sized, no reason to change
+Next Review: Quarterly earnings (Q3 2024)
+```
+
+### ADD Decision
+
+**Criteria:**
+- ✅ Thesis: Strengthening or intact with high conviction
+- ✅ Valuation: Undervalued or fair with improving fundamentals
+- ✅ Position Size: Below target, room to add without excessive concentration
+- ✅ Opportunity: Among top ideas, better than alternatives
+
+**Example:**
+```
+Position: Meta Platforms (META)
+Thesis: ✅ Strengthening (AI monetization exceeding expectations, cost discipline)
+Valuation: ✅ Undervalued (P/E 22x vs 28x historical, PEG 1.2)
+Position Size: ✅ 5% of portfolio (room to add to 8-10%)
+Opportunity: ✅ Top conviction, better expected return than alternatives
+
+Decision: ADD 3-5% more (increase position to 8-10% total)
+Rationale: Thesis improving, valuation attractive, high conviction
+Entry Strategy: Add 3% now, 2% more if pullback to $450 support
+Risk Management: Set stop-loss at $420 (recent low)
+```
+
+### TRIM Decision
+
+**Criteria:**
+- ⚠️ Thesis: Weakening OR still intact but lower conviction
+- ⚠️ Valuation: Overvalued or expensive vs historical/peers
+- ⚠️ Position Size: Exceeded target (>12% for medium conviction, >15% for high conviction)
+- ⚠️ Opportunity: Better alternatives available or risk reduction needed
+
+**Example:**
+```
+Position: NVIDIA (NVDA)
+Thesis: ✅ Intact (AI demand strong) ⚠️ but slowing growth rates expected
+Valuation: ⚠️ Expensive (P/E 65x vs 45x historical, extended vs peers)
+Position Size: ⚠️ 18% of portfolio (exceeded 15% max)
+Opportunity: ⚠️ Other high-quality tech at better valuations
+
+Decision: TRIM from 18% to 10-12%
+Rationale: Valuation extended, position too large, take some profits
+Trim Strategy: Sell 6% now, consider selling another 2% if rallies above $950
+Redeployment: Add to underweight healthcare and financials sectors
+Tax Strategy: Sell highest-cost-basis shares first (minimize tax impact)
+```
+
+### SELL Decision
+
+**Criteria:**
+- ❌ Thesis: Broken or significantly impaired
+- OR: Valuation severely overvalued with deteriorating fundamentals
+- OR: Better opportunities + need to reduce position count
+- OR: Risk management (stop-loss triggered, risk too high)
+
+**Example:**
+```
+Position: Teladoc (TDOC)
+Thesis: ❌ Broken (telehealth adoption slower than expected, competition intense, path to profitability unclear)
+Valuation: ❌ Expensive vs peers despite losses (EV/Sales 2.5x vs 1.2x sector)
+Position Size: ⚠️ 4% of portfolio (not excessive, but capital can be better deployed)
+Opportunity: ❌ Multiple better healthcare alternatives (UNH, ELW, CVS)
+
+Decision: SELL (exit position entirely)
+Rationale: Investment thesis has not materialized, competitive position weakening, capital better deployed elsewhere
+Exit Strategy: Sell entire position over 2-3 days (avoid moving market)
+Redeployment: Reallocate to UnitedHealth Group (stronger healthcare thesis)
+Tax Benefit: Harvest $2,000 capital loss to offset gains
+Lesson Learned: Avoid unprofitable growth stocks in competitive industries
+```
+
+## Position Review Checklist
+
+Use this checklist when reviewing each position:
+
+### Fundamental Review
+- [ ] Read recent earnings report and call transcript
+- [ ] Review updated financial metrics (revenue, margins, EPS)
+- [ ] Check for guidance changes (raised, lowered, maintained)
+- [ ] Read recent analyst reports or news
+- [ ] Verify competitive position (market share, new entrants)
+
+### Valuation Review
+- [ ] Calculate current P/E, P/B, EV/EBITDA
+- [ ] Compare to 1Y, 3Y, 5Y historical averages
+- [ ] Compare to peer group
+- [ ] Calculate PEG ratio
+- [ ] Assess if valuation justified by fundamentals
+
+### Portfolio Fit Review
+- [ ] Calculate current position size (% of portfolio)
+- [ ] Assess if size matches conviction
+- [ ] Check if position contributes to concentration risk
+- [ ] Verify sector allocation impact
+- [ ] Evaluate correlation with other holdings
+
+### Risk Review
+- [ ] Identify new risks (regulatory, competitive, macro)
+- [ ] Assess if stop-loss should be updated
+- [ ] Review downside scenario (what could go wrong?)
+- [ ] Check beta and volatility (has it increased?)
+- [ ] Evaluate if risk/reward still favorable
+
+### Action Decision
+- [ ] Does thesis warrant HOLD/ADD/TRIM/SELL?
+- [ ] If change needed, what is specific action?
+- [ ] What is timeline for action (immediate, gradual, wait for level)?
+- [ ] What are trigger points for future action?
+- [ ] Document decision and rationale
+
+## Common Position Evaluation Mistakes
+
+### Mistake 1: Anchoring to Purchase Price
+
+**Problem:** "I bought at $100, now it's $80, I'll wait to break even before selling"
+
+**Why wrong:** Purchase price is irrelevant to forward returns. Sunk cost fallacy.
+
+**Correct approach:** Evaluate position based on current fundamentals and forward outlook. If thesis broken, sell now regardless of gain/loss.
+
+### Mistake 2: Letting Winners Run Indefinitely
+
+**Problem:** "It's my best performer, I'll never sell!"
+
+**Why wrong:** Position becomes oversized, creates concentration risk, valuation may become stretched.
+
+**Correct approach:** Trim winners back to target weight periodically. Take some profits. Reinvest in undervalued areas.
+
+### Mistake 3: Selling Losers Too Quickly
+
+**Problem:** "It's down 15%, I need to cut losses"
+
+**Why wrong:** Volatility is normal. Selling in panic often locks in losses before recovery.
+
+**Correct approach:** Evaluate if thesis still intact. If yes, consider adding (averaging down). If no, sell regardless of loss size.
+
+### Mistake 4: Ignoring Valuation ("Quality at Any Price")
+
+**Problem:** "This is a great company, valuation doesn't matter"
+
+**Why wrong:** Even great companies can be overvalued. Future returns depend on entry price.
+
+**Correct approach:** Great companies at fair prices. Trim when expensive, add when cheap, even for high-quality names.
+
+### Mistake 5: Falling in Love with Stocks
+
+**Problem:** Emotional attachment prevents objective evaluation
+
+**Why wrong:** Stocks don't love you back. Capital allocation should be ruthlessly rational.
+
+**Correct approach:** Treat positions as capital deployment decisions, not relationships. Be willing to sell anything if better opportunity exists.
+
+## Summary
+
+**Position Evaluation Framework:**
+
+1. **Thesis Validation (40%)** - Is the story still true?
+2. **Valuation Assessment (30%)** - Is the price right?
+3. **Position Sizing (20%)** - Is the size appropriate?
+4. **Relative Opportunity (10%)** - Are there better uses of capital?
+
+**Four Actions:**
+
+- **HOLD:** Thesis intact, fair valuation, appropriate size
+- **ADD:** Strengthening thesis, undervalued, room to add
+- **TRIM:** Weakening thesis OR expensive OR oversized
+- **SELL:** Broken thesis OR severely overvalued OR much better alternatives
+
+**Best Practices:**
+
+- Review positions quarterly (at minimum)
+- Document thesis at purchase
+- Update thesis as new information emerges
+- Be willing to admit mistakes early
+- Trim winners to maintain diversification
+- Average down only if thesis intact
+- Ignore purchase price (sunk cost)
+- Remain objective and unemotional
+
+**Remember:** Position evaluation is both art and science. Combine quantitative metrics with qualitative judgment. When in doubt, reduce position size rather than holding full position or selling entirely.