Building a Portfolio

Introduction

The scoring pipeline produces candidates with composite tiers and opportunity types. This guide walks through how to use those outputs to construct a portfolio — from selecting qualifying candidates to calculating your cash position.

Step 1: Start with Qualifying Candidates

Only EXCEPTIONAL and HIGH composite tier stocks get allocations:

• EXCEPTIONAL and HIGH — eligible for position sizing
• WATCHLIST — monitor only, never allocate
• NONE — skip entirely

If no stocks qualify at EXCEPTIONAL or HIGH, hold cash. An empty portfolio is a valid position.

Step 2: Check the Sizing Matrix

Position sizing is determined by composite tier multiplied by opportunity type:

| | EXCEPTIONAL | HIGH | WATCHLIST | |---|---|---|---| | Compounder | 15% | 8% | 0% | | Mispricing | 12% | 6% | 0% | | Both | 20% | 10% | 0% |

"Both" gets the largest allocation because two independent scoring signals (value + quality) provide stronger evidence. A stock qualifying on both Track A (Compounder) and Track B (Mispricing) combines durable competitive advantages with temporary market undervaluation — a rare and powerful combination.

Step 3: Apply Diversification Constraints

• Maximum 10 positions per portfolio
• Watch for sector concentration — avoid loading up on one industry
• The 10-position limit is a hard cap, even if more stocks qualify

Even if multiple candidates in the same sector pass all scoring gates, consider your total sector exposure. The engine scores each stock independently — it does not automatically balance across sectors.

Step 4: Calculate Your Cash Position

• Cash = 100% minus the sum of all position sizes
• Cash is a deliberate position, not a failure to be fully invested
• In conservative market environments, the system may produce fewer qualifying candidates, resulting in a larger cash position

Not being fully invested is a valid output. If the engine only finds 3-4 qualifying candidates, it is telling you the opportunity set is limited. Forcing capital into marginal ideas to achieve full investment is one of the most common portfolio construction mistakes.

Step 5: Review and Rebalance

• Check weekly for composite tier changes
• If a stock drops from HIGH to WATCHLIST, reduce to 0%
• If a stock is eliminated, exit the position
• Don't rebalance on minor score fluctuations — wait for composite tier changes

A change in composite tier (e.g., HIGH to EXCEPTIONAL) is meaningful. A small change in composite score within the same composite tier is usually noise. See the Weekly Review Process guide for a structured approach.

Common Pitfalls

• Don't allocate to WATCHLIST stocks — the system explicitly recommends 0%. If a stock hasn't cleared enough scoring gates, the engine is saying it does not warrant capital allocation yet.
• Don't fill a 10-position portfolio for the sake of being "fully invested" — quality matters more than quantity. A 4-position portfolio with high-scoring beats a 10-position portfolio with diluted evidence.
• Don't ignore sector concentration — diversification matters even among high-scoring picks. Three strong candidates from the same sector significantly increase your exposure to sector-specific events.
• Don't fight the cash position — if the system produces few qualifying candidates, that's information. The engine is telling you the opportunity set is limited.