There’s a lot of information about buying a stock, how to value it, along with countless best-buy lists. However, the actual execution of a buy order is often overlooked, even though it’s a crucial step in the investment process.

Many investors spot a potential opportunity and dive in, but the results can be hit or miss.

I follow a set of steps to navigate the entire investment process, ultimately bringing one promising candidate to the forefront for my portfolio. Once I pinpoint a potential stock and check off my criteria, I start writing an investment thesis. At this juncture, I’m ready to make my move; I like what I see and initiate a starter position.

Typically, this amounts to around 1% of my portfolio. I like to think of this as the beginning of a ‘dating phase’ with the stock.

🌹 When buying a stock ensure to date a little first.

During this period, I closely watch the company, diving deeper to fill in any gaps in my thesis. I gauge the momentum and investor appetite, gradually solidifying my conviction to increase my stake by another percent or two.

There are times when a company may not live up to my expectations. This leads me to either trim my position, sell it off if my thesis proves incorrect, or move on to a better candidate.

In simple terms…we break up.

However, if a company aligns with my thesis, I’m ready to execute a full position based on my initial weighting criteria. This typically falls within a range of 2-4%, with a full position often being around 5%.

As a concentrated investor, I’m aware that some winners may rise above 5%, so I tend to maintain about 15 fully weighted positions alongside a few starters.

I’m always prepared to part ways with any underperforming stock. That’s why I prefer to take my time before fully committing. (And if my wife happens to be reading this, rest assured, I committed to you from day one! You’re definitely not a stock, and I know she’s not checking this anyway.)

🪜 I always execute in tranches when buying a stock.

A tranche refers to a portion of something, particularly in the context of finance. For example, one might say they released a tranche of a loan or completed the first tranche of an acquisition.

I like to approach my investments with a similar mindset, dividing my purchases into three tranches. I start with a small position as my first tranche; as my conviction in the stock grows, I’ll execute my second tranche, and when I’m fully committed, I’ll make my final investment in the third tranche.

This method focuses on the initial purchasing and building up a new position. If I truly believe in a company’s potential, especially if it’s a high-conviction investment, I don’t hesitate to add to my holdings over time.

I’ll save discussions about weighting and trimming for another post, as that’s a whole different art form in itself. However, I generally don’t trim a position just because it has grown large; I’ve allowed winning stocks to comprise 10% or even 20% of my portfolio.

📈 If an investment is performing well, why not let it run?

Some investors prefer to maintain an equally weighted portfolio, trimming their positions when they reach a certain threshold—say, selling back to 4% once they hit 8%. Ultimately, there’s no one-size-fits-all approach when the goal is to make money.

It’s crucial to consider weighting when researching a company. If I believe in a business but recognise that it isn’t stronger than my other holdings, I might allocate a 2% weight and then buy in tranches to build up my position.

🙅‍♂️ Rarely do I invest in a whole position at once.

Why not? I find that taking a measured approach helps prevent me from rushing through due diligence or writing a full thesis up front.

Since fundamentals can change frequently, I prefer to conduct my research, focus on the core aspects of a stock, and then use a starter position to observe more closely. I can’t deeply analyse every company on my watchlist, so I allocate time to those where I’ve committed to a small position, and that strategy seems to work well for me and others. The dating stage is a very important step in the relationship you will have.

What about missing the price point?

Now, regarding the concern of missing the ideal buy price, it’s essential to understand that no investor has a set-in-stone price (to the cent) at which a stock becomes perfect for purchase.

For instance, if I identify a small-cap stock I believe is a good buy within the range of $1.50 to $2.00, I’ll execute my buy within that range. If I miss a few ticks here and there, it’s not a big deal to me, especially if I’m confident in the long-term thesis.

For value investors, there’s often a predetermined price point with a built-in margin of safety. In such cases, buying is determined by this price range. For example, if you’ve established that a company’s intrinsic value is $5 and you’re aiming for a 20% margin of safety, then any price below $4 is considered a solid buy. In this scenario, worrying about whether you buy at $3.80 or $3.90 becomes irrelevant.

Similarly, for growth plays, if you believe the current price doesn’t reflect the long-term growth potential, then fretting over a few cents isn’t a concern. Ultimately, it all circles back to your investment thesis. Even if the price creeps up, your average buy price smooths out over time.

An example of buying in Tranches.

As a recent example, I was looking at a small cap on the ASX, Findi Limited. I started my initial review of the business at 0.90 cents (AUD). It was going through a shuffle and trying to execute some deals in addition to a capital raise. After securing capital, raising the required funds, and a number of other milestones, the company started to climb and climb.

It currently sits at $7.75 AUD…not bad for a 52-week run.

As the company started to deliver, buying at $1 then $3 and then $4.50 didn’t matter when the company hit a peak of $8.30. Fundamentals backfill and as the company increases in value and starts delivering, it continues to become a better buy. So my starter would have been a good buy, but to me, so was $3 and higher. I think it is now expensive and needs to backfill fundamentals to grow into its current high valuation.

However, being in India and understanding the massive opportunity ahead, the growth of this company is just beginning. So I may reassess it later once more milestones are achieved. This is just an example of dating a stock and then marrying it at various price points along the way.

Executing a position should always be done in stages (tranches), as it also protects the downside risk if the thesis is incorrect. I don’t have a typical timeframe for each position; it is all based on what the company is doing. Sometimes a starter is held for a few months, sometimes a year, before I execute a bigger position.

When I am wrong on the starter, I offload, and it does not hurt my overall portfolio as the weighting was small in comparison.

💔 Then I get a divorce…

When I consider buying a stock and decide to take a starter position, I always ensure I have a certain amount of capital set aside for that investment. If the company meets my expectations, I reward it with additional funds, increasing its weight in my portfolio.

For example, let’s say you have a $1,000,000 portfolio and typically allocate around 4% to each company. This means you’d have approximately 25 positions, each receiving about $40,000 in capital—give or take.

If you’re not fully deployed and wish to build out another position, you might identify a promising investment and allocate $10,000 to that starter position, roughly 1% of the total portfolio.

Just to clarify: these figures are simplified and not a detailed breakdown, but they serve as a good illustration.

Once the starter successfully navigates its initial stages, you might allocate another $10,000 in Tranche 2, and eventually commit the remaining $20,000 to create a full position, thereby reaching your target 4% weighting over time.

This approach is pretty consistent across the majority of my holdings. I always keep some cash on hand to invest in new starters and adjust my allocations as the portfolio evolves. I’m never fully invested. I prefer to allocate fresh capital to startup positions instead of selling current ones—unless I choose to exit a position—to make way for new opportunities.

🫃 Do I ever take a full position when buying a stock?

I don’t adhere to a position if it’s one I plan to hold long-term. While I consider myself a long-term investor with an indefinite holding period, I rarely hold onto a stock forever.

In the small-cap sector, discovering those rare, transformative investments—like a 100-to-1 return—is quite a challenge.

By concentrating on the portfolio as a whole, I believe it ultimately benefits long-term returns. I aim to grow my small-cap fund at an annual rate of 20%, focusing on consistent capital compounding every year instead of chasing that elusive monster stock.

When it comes to taking full positions, if I spot a trading opportunity (yes, I do engage in short-term trades), I will go ahead with a full position trade. You might wonder if this contradicts my investment philosophy. In reality, my philosophy rests on one fundamental principle: make money 🫰.

This year, amidst adding a few positions and rebalancing my portfolio, I’ve executed about half a dozen trades based solely on capturing profits, with no intention of holding long-term. The bull market in gold and silver, the market volatility leading up to the U.S. elections, and various macroeconomic factors have provided some enticing trading opportunities.

🚫 Don’t try this at home…

In this context, I take a full position and hold it until the trade plays out. Recently, I observed a small-cap company facing a significant sell-off—around a 40% decline in just one day. This was largely due to missed earnings and revenue expectations, compounded by a sizable short position from an aggressive firm that was disseminating negative information to the media. All signs pointed to a severe downturn.

However, being familiar with the company’s growth potential abroad after visiting their stores and seeing firsthand their traction in Asia, I recognised that loading up on shares was warranted after the frenzy of selling subsided.

Within a few days, sentiment shifted, the short position was closed, and the company rebounded by 30-40% in the first week, eventually returning to its original price and surpassing it shortly after.

Timing played a crucial role in this situation, underscoring the importance of knowing the companies and seizing opportunities during market volatility.

For these special situations, I deploy any capital I have on hand into it. The purpose of mentioning this is I don’t have a tranche approach on a company I don’t intend to ever date…just have fun.

🔑 The Key takeaway?

Executing orders and adding new positions is crucial to the overall portfolio management process. I believe it is a good practice to gradually increase positions rather than going all in at once.

Rarely do opportunities arise where companies present such a compelling case that it warrants a full investment. It does happen, but it is infrequent. In the meantime, “dating” and “flirting” with potential stocks remain a prudent approach before committing fully to them.

On occasions, buying in tranches also depends on the available capital on hand. If an opportunity arises and cash is limited, you need to ensure that selling current holdings to free up capital is a better long-term strategy.

Otherwise, why not simply add to your stronger positions from the start?

The starter position is a very important part of my own investment process. Since I have allocated a small percentage to it, it now demands my attention over other options on my watchlist.

There is no limit to how many starter positions you can have, or how long you can “date” a stock. I tend to have several on the go. If my other positions are performing well and I have no reason to adjust them, I dedicate much more time to analysing the stocks I am considering, reflecting on why I am interested in them, and contemplating whether I will get married 👰.