Sometimes we hear experienced investors talk about core position vs trading position and our obvious question is:
“what exactly does that mean?”
Example of a core position with a trading position:
Let’s create a hypothetical money manager and to make the conversation timely, let’s make him a money manager who believes there is a long term bull market in precious metals going on right now.
This money manager owns a 15% core position in gold bullion and a 15% core position in the stocks of large gold mining companies. Since this manager believes that the bull market in gold will continue, he has no intention of selling these core positions. However, when the market gyrates strongly, he will add 5-15% to his gold stock holdings and sell them (often short term, ie less than a year) as they swing up.
Why do money managers do this?
Some do it to reduce risk overall as they don’t want such a large position for risk management purposes but do want to take advantage of positive momentum. Others get antsy sitting around doing nothing and to satisfy their urge for action they do this – it satisfies the urge but also can add to profits and keep them from selling core positions. Mostly though, in my opinion, it’s the case that they come to know a particular industry so well, and how the market responds to it, that they “feel the pulse” and actually get quite good at spotting individual companies that may have sold down too much or sold high too much. Many money managers actually get pretty good at this.
Core Position vs Trading Position – In Summary
The ability to do this comes with experience and having an idea ahead of time of what you want to do. If a money manager has no plan, she might likely miss these opportunities or do something dumb. So the next time you read about a fund manager or such “trading around” a core position, you now know what it means. However, it doesn’t mean go copy them! It takes some time to develop this experience and sticking to core competencies is key when dealing with millions of dollars of other people’s money! Get knowledge and wisdom before attempting these things on your own, ok?
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