### All in a Day’s Work – Mental Capital Allocation

A Portfolio Manager acts as the final arbiter of what is a good idea and what is not. The Portfolio Manager’s acumen is what investors are ultimately paying for. They need to know each position almost as well as the analyst to be able to properly position it against the rest of the positions in the portfolio. The problem is that most PMs don’t have the time to carry that responsibility because they’re invested in too many positions.

We can prove that PMs don’t know their positions well enough by breaking down a PM’s performance over the course of a year. Let’s assume that the average portfolio manager has 2,500 work hours a year to dedicate to stock analysis (50 weeks times 50 hours). The amount of time dedicated to stock analysis is determined by calculating the percentage of time dedicated to raising capital, communicating with existing investors, running the business, and staring at the P&L.

If the typical portfolio consists of 100 positions and has 50% turnover, then the PM had to understand 150 positions over the course of the year. Now, let’s assume that a PM evaluates two ideas for each position they put in the portfolio. That doubles the number of positions analyzed to 300.

The result is 6 hours (basically a day) per year for each position in the portfolio. A PM is ultimately in charge of answering a simple question, “Do I believe my analyst’s assumptions?” 6 hours is hardly enough time for due diligence of that sort.

Don’t take my word for it. Do the math for yourself:

1. HOURS: Measure your yearly hours using the steps above

2. ACTUAL POSITIONS: Measure historical average positions per year

3. ANALYSIS TIME: Measure the time it takes to properly analyze a company (take an example of work you felt really good about)

4. THEORETICAL MAX NUMBER OF POSITIONS: Divide #1 by #3

5. RESULT: If Actual Positions is greater than Theoretical Max Number of Positions, then you have too many.

Self-reflection is a key to success because it shows us the proper steps to improve. Reflect on how you allocate your Mental Capital and take the time to figure out if you have the time.