I’ve just updated Keeping Score for 12/11. If you’re on the blog, you can click the tab at the top of the page.
My analysis of 2011 as a whole tomorrow.
Category Archives: Keeping Score
I’ve just updated Keeping Score for November 2011
I’ve just updated the Keeping Score page. It you’re on the blog, you can also click the tab at the top of the page.
I’ve just updated Keeping Score for October
I’ve just updated Keeping Score. If you’re on the blog, you can also click the tab at the top of the page.
portfolio checkup (II)
measuring performance
As I wrote yesterday, one reason for doing a portfolio checkup is to give yourself a report card/planning tool for assessing your portfolio performance and making appropriate adjustments.
getting to know yourself
A second reason is to, as time goes by, analyze yourself–the strengths and weaknesses, blind spots, or maybe just plain quirks–that influence your investment performance in recurring fashion.
For example:
1. On the most basic level, consider whether you should involve yourself in active management at all. Are you putting in the time and effort to follow the stocks/funds you own? Do you have a well thought out reason for having purchased them in the first place? Are they, either all individually or in the aggregate, adding to performance? …or are you losing money on almost everything?
If you fit this laast description, maybe you should stock with a paper portfolio for a while and keep your real money in index products.
2. A variation on #1–do you have more stocks than you have time to follow? From a making money perspective, it’s better to do a few things well than a lot of things badly.
3. Do you spend all your time on your strong-performing stocks and forget about the weak ones?
This is the normal human tendency, but it’s one to overcome as fast as you can. If anything, your time allocation should be the opposite.
If you fit this description, you may just have too many stocks. Or maybe you can’t bring yourself to sell a stock at a loss–which is the most common mistake that even the most seasoned investors make, in my opinion.
In either case, this is a behavior pattern to recognize, and a situation to deal with immediately.
4. Are there types of stocks you typically do well with or do badly with?
This is a very broad question. In my career, for instance, I’ve found I’ve done the best with stocks in consumer, technology, leisure/entertainment and real estate industries. I’ve done the worst with financials and medical products/devices.
I can still remember clearly information sources from twenty-odd years ago that provided detailed and highly persuasive (to me, anyway) research that invariably turned out to be wrong.
I know I’m out of my depth in markets like Indonesia or Korea.
In cases like this, it may be interesting to know why you’re successful or unsuccessful in certain areas–but it’s not necessary. The more important thing is to realise that your experience is what it is. Just stop doing the things that always turn out badly!! (For most people, this is much easier to write than to do.)
5. Do you sell too soon? …or do you hold on too long?
This, by itself, is useful to know. In my experience, there are usually psychological cues that you either respond to or ignore that produce this behavior–or there are trading signs, either in volume or price action, that you use that produce the same result. By looking for and paying attention to them, you may be able to improve this aspect of your game.
6. Do you buy badly?
The cliché (and to steal a line from Hegel, things have to be very true to get to be clichés) is that value investing is all about buying well; growth investing is all about selling well. To my mind, buying badly means acquiring the stock at a price where there’s little potential for profit. For growth stocks, this typically means buying just as growth begins to decelerate; for value stocks, this means buying assets worth $1 for $.80 each instead of at $.30-$.40. For all stocks, this point is usually when the stock is the most popular.
7. Where do you get your ideas? They can come from anywhere. Some sources–maybe your own experience as a consumer–are great; others, like the brokerage house in #4 above, may be awful all the time. Once you’re aware of patterns, you can pay closer attention to the good sources and eliminate the bad ones.
Be careful of TV and radio shows. Investors who are guests on stock market shows always talk about their largest positions. They never (for legal reasons) talk about stocks they’re thinking of buying or are in the process of acquiring. Sometimes, although this is unethical conduct, they talk up stocks they are warming up to sell. The commentators on these shows are by and large professional news presenters, not professional investors.
portfolio checkup
A friend who’s studying in the Netherlands and just starting out as an investor emailed me a question about what a portfolio checkup/cleanup is supposed to do. I thought I’d reply in this post and in tomorrow’s.
two objectives
Basically, you analyze your portfolio carefully and at regular intervals to do two things:
–so you know for sure how your portfolio plan is working and what quantify which stocks or ideas are adding to or subtracting from your performance, and
–so you gradually learn about your investing personality. By this I mean what things you typically do well and which ones you aren’t so good at. You want this information, as painful as it may sometimes be to find out, so that you can emphasize the former and minimize the latter. After all, the main goal is to earn/save money–not to massage your ego.
#1 figuring out performance
There’s a purely mechanical aspect to this. You have a benchmark like the S&P 500, by which you judge your performance (you could achieve this return by buying an index fund. You should only spend time and effort to select individual stocks or focused ETFs/mutual funds if you expect a return higher than the index fund will give you).
Over the past three months, the S&P 500 is down about 7.5% (ouch!). Over the past month, it’s up about 9%.
Your first task is to calculate how your portfolio has performed vs the S&P over the interval you’re studying–both as a whole and each individual issue. (For what it’s worth, after a long period of doing well, my stocks have been clobbered over the past month.)
what to do with this data, once it’s collected
a. look for outliers, especially big losers. Everyone has losers. Everyone, even the most seasoned professional, also has an almost infinite capacity for denial. My first mentor as a portfolio manager used to say that it took three winners to offset the damage that one big loser can do if it’s left to run amok and not caught early. So finding losers and eliminating them is important.
b. ask if your plan is working. This presupposes you have a plan. A checkup may well bring out that you’re not bringing your intelligence, knowledge and experience to the party but are, so to speak, mailing it in and hoping that’s good enough. (We all find out quickly that it isn’t. Although individual market participants may not be the sharpest pencils, the collective entity is extremely acute.)
For example, in general my plan is:
–world economies are still expanding, although slowly. So I’m still positioned for an up market. The EU has me worried. I’m thinking about shading toward larger, stodgy sort-of-growth stocks as a defensive measure but haven’t done anything much yet.
–there will continue to be a sharp separation between haves (mostly meaning having a job) and the have-nots (the 10% or so long-term unemployed in the US). I want to own stocks that cater to the former and want to avoid stocks whose market is the latter.
–Asian, especially Greater China, exposure is a good thing, because that’s where most of the world’s economic energy is centered
–I think the continuing proliferation of smartphones, tablets and e-readers plus the rapid development of cloud computing mean there’s money to be made in at least some tech stocks.
For me, the relevant question is how this is working out for me overall. The answer is: great, until about a month ago.
A second aspect of figuring out performance is to look, stock by stock, at plan vs. performance. Reading any of my posts about TIF will get you my stock-specific plan since I bought the security about a year ago. Again, until about a month ago, things were working well …since then, not so much.
c. acting on this information
Even in the best of times, the stock market is always a process of two steps forward, one step back. Also, all stocks, even the long-term winners, have periods of underperformance. There’s a real experience-and temperament-based art to deciding how to react to the data that show your stocks are underperforming.
In my case, I’m thinking so far that this is a temporary adjustment phase. But I’ve also got to at least begin to consider how I’d rearrange my holdings if the underperformance persisted. This thought process–and the possible move to action–is partly a question of risk tolerance, partly of conviction in the correctness of my analysis of individual stocks, and partly a judgment, based on experience, of what is a normal trading pattern vs. a fundamental change in market direction.
More tomorrow.
