Course 501: Constructing a Portfolio
Portfolio Turnover
In this course
1 Introduction
2 The Fat-Pitch Approach
3 What Do the Academics Say?
4 How Many Stocks Diversify Unsystematic Risk?
5 Non-Market Risk and a Concentrated Portfolio
6 Portfolio Weighting
7 Portfolio Turnover
8 Circle of Competence and Sector Concentration
9 Adding Mutual Funds to a Stock Portfolio
10 The Bottom Line

If you follow the fat-pitch method, you won't trade very often. Wide-moat companies selling at a discount are rare, so when you find one, you should pounce. Over the years, a wide-moat company will generate returns on capital higher than its cost of capital, creating value for shareholders. This shareholder value translates into a higher stock price over time.

If you sell after making a small profit, you might not get another chance to buy the stock, or a similar high-quality stock, for a long time. For this reason, it's irrational to quickly move in and out of wide-moat stocks and incur capital gains taxes and transaction costs. Your results, after taxes and trading expenses, likely won't be any better and may be worse. That's why many of the great long-term investors display low turnover in their portfolios. They've learned to let their winners run and to think like owners, not traders.

Next: Circle of Competence and Sector Concentration >>

Print Lesson |Feedback | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2015 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.