Ken Kam's Best Ideas Blog

I’ve been selecting stocks for the Best ideas Portfolio by looking at the model portfolios of top Marketocracy members looking for cases where the member is literally betting his track record on a stock by making it a large position. Among our top members are many full-time investors and Wall Street professionals who consider their track record to be a credential that is as valuable as their diplomas. So, when I see someone with a great track record develop enough confidence about a stock to make it a big position, I think its worth paying attention.

As Elan (ELN) has appreciated, I have felt comfortable letting it grow into the single largest position in the portfolio in part because it was the single largest position in Chris Rees’ model portfolio. Chris has an amazing track record with this stock. Although he did not avoid the drop from $30 to $3 in March of 2005, his research gave him the confidence to step in and buy at $3 when everyone else was selling. It took me another 3 months to come to the same conclusion. By the time I did, the stock had already more than doubled to $7. So when Chris Rees sells his position in Elan, as he did yesterday, it’s time to reexamine the stock.

Elan has grown to be 27% of this portfolio, a weight that requires the highest level of confidence to justify keeping. There are a number of regulatory milestones coming up and the FDA and its European counterpart (EMEA) can sometimes be capricious. Take a look at how Dendreon’s (DNDN) stock has been affected by the FDA approval process for Provenge.

As much as I like Elan’s prospects for the rest of this year, I must admit that I cannot justify keeping 27% of the Best Ideas portfolio in this stock. That’s why I’ve decided to sell about one-third of this position. After the sale, Elan will still be about 20% of the portfolio — a level that better reflects my confidence in the stock.

I’m not going to put the cash to work right away. I’m looking for a stock outside of the energy, natural resources, or biotech areas, to give the portfolio more diversification.