Spring cleaning is one of those phrases people use when they want to make something dull sound virtuous (or is spring cleaning just something done on farms and in TV shows?). In domestic terms it might mean swapping over a wardrobe or mopping out the hallway.

But there is a market related point inside the domestic metaphor.

Most portfolios do not suffer from a lack of opportunity. They suffer from accumulation. Too many positions were bought for reasons that no longer exist or were never very good to begin with. They remain because selling would require an unpleasant admission. Possibly the idea was weak to begin with. Or even more likely, there never was an edge at all.

This is especially true for discretionary investors. They do not usually have twenty genuinely differentiated insights at once. They may have two or three. These lead to sensible positions that are aligned with sensible views. Moist other positions are just residue.

There is actual evidence for this.

A paper appropriately titled Best Ideas asks a simple question: what happens if we focus on the stocks in which managers appear to have the most conviction? The answer is that these “best ideas” outperform both the market and the other stocks in the same managers’ portfolios by about 2.8% to 4.5% per year, depending on the benchmark. The contrary result is the one that should interest most investors: the vast majority of the other stocks managers hold do not exhibit significant outperformance. That is not a small nuance. Any real signal is concentrated in only a few stocks. The rest is just clutter, like gloves in the bottom of your pile of summer t-shirts.

This should possibly not be surprising. Edge does not spread itself evenly across all holdings. A manager might know one industry well, understand one business cycle shift, or recognize one valuation dislocation. That does not imply she also has a sensible view on eighteen other names. Yet portfolios often behave as though insight scales linearly with ticker count.

That is a useful corrective to the fantasy that intelligent investors possess a broad, portable gift for stock picking. At best, they know a little corner of the world. They get into trouble when they wander out of it.

This is where portfolios start to bloat.

The usual defense of the long tail of holdings is diversification. Sometimes that is true. But there is a difference between smart diversification and indiscriminate accumulation. One is a risk management decision. The other is what happens when investors confuse owning more things with knowing more things.

Retail investors are even worse. They buy a stock because they read something persuasive, or because the chart looked strong, or because a story made emotional sense in the moment. Six months later the original reason is gone, but the position remains. This positional inertia is one of the ways portfolios under-perform.

In summary, investors are not very good at throwing things out.

That last point matters because stale positions do not just occupy capital. They occupy attention. A dead idea is rarely left alone. It demands reinterpretation. And because of cognitive dissonance this process is far from being a neutral process. The investor starts revising the thesis to fit the holding rather than revising the holding to fit the facts. “It is now a long-term investment” is one of the oldest euphemisms in finance. This is also known as “I don’t know why I own this”.

The right question is not, “Do I still like this stock?” That question is useless because liking is cheap and memory is selective.

The better questions are:

What was the original thesis?
If you cannot state it clearly, you never had one or at least it was too weak to be memorable.

What evidence says that edge still exists?
Markets are adaptive, and many opportunities decay after they become obvious.

Would I initiate this position today at this size?
Where you entered doesn’t matter. What matters is now.

Is this here because it improves the portfolio, or because removing it would force an admission?
That is usually the real question.

None of this is an argument for naive over-concentration. A portfolio of three stocks is not evidence-based sophistication. Simplicity is good but over-simplicity isn’t. But there is a strong case that the incremental holdings in many portfolios add less insight than their owners imagine, and often no insight at all. The empirical evidence suggests that whatever skill exists is concentrated in a small subset of positions, while the rest mainly reflects inertia.

That leads to the real meaning of spring cleaning in markets.

It means recognizing that you only have a few good ideas at a time (and while we are being honest, a few good ideas puts you well above average). The discipline is not in finding fifty more. Only internet LARPers have 50 uncorrelated edges. The discipline is in identifying which positions still deserve capital, and which are only there because you didn’t have had the balls to kill them.

Disclaimer

This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting, or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact HTAA or consult with the professional advisor of their choosing.

Except where otherwise indicated, the information contained in this article is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution of any future date. Recipients should not rely on this material in making any future investment decision.