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.
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.