Staying the Course

Having some faith in your positions is crucial to long-term portfolio outperformance.

This implies that you have enough confidence and knowledge of why your investment choices are sound, to stick with your strategy during the softer markets. Much potential portfolio outperformance has been undone due to a lack of knowledge and faith in choices, by selling out during a weak patch.

That's one reason I favor an investment diary - writing down what I picked and why, and then reviewing those writings before I buy or sell. Although I've been practicing this for less than a year, I find it's already helping me reduce my portfolio turnover, increase the clarity in my investments, and provide me with better confidence to continue to "stay the course" over the past while. I think that this has been at least partially responsible for helping me to produce a return rate in my own portfolio over the past year in excess of 30%.

I highly suggest that you start an investment diary, together with an investment scrapbook. Both are "capital ideas" likely to improve your investment performance.



JW

The Confused Capitalist

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Dear (Investment) Diary

Dear Diary: What I write down is important!

In addition to things covered in recent blog postings relating to planning to improve your investment returns, there's also another thing you can do.

And that is to keep an investment diary - what you bought, when, and why (most important is why, since your statements will tell you the what and when). Write down a bit about what attracted you to that stock/ETF/investment, and what your "exit point" is. There's almost always an "exit point", even for the most conservative investments - perhaps it's when/if the yield falls below a certain level. If you're a more active trader and trade in small cap stocks, then you are probably looking for a certain pe ratio to be achieved ... write it down.

Review your writing occasionally. This will help you to stay the course where needed, or to remember where you thought was a good point to get out (before you got all those huge gains and got married to the stock!). It can help foster a better perspective.

In addition, it can help simply to write down when you are thinking of changing your portfolio, and getting your thoughts straight before doing anything drastic. This definitely helped me in the days and weeks following hurricane Katrina, when I initially felt the economic effects might be much worse than originally envisioned.

Finally, it can also help in your annual review of what you did right and can get even better at, and what you need to mitigate - you'll have a record that you can peruse with detachment on your thoughts and worries of the day.

One last thing we'll cover later before moving onto another topic is: "scrapbooking". More later ...

JW

The Confused Capitalist

Lift Your Investment Returns

In addition to the planning items I've recently discussed in the last two postings, there's also another way to raise your investment returns.

And that is done by analyzing what you have done with your portfolio over the past while, perhaps a year or so. Because if you stop to look and think about your various trades, you'll probably be able to glean some insights into your own investment personality.

For instance, you might find that you are drawn to the latest and greatest growth story, something that was discussed in the fascinating research paper, The Seven Sins of Fund Management as Sin Number Six, or you might be more subject to Sin Number Five. Whatever; the point is that if this particular investing flaw is causing you to have a lower than potentially possible return, then you need to do something about it. And that can only be possible by realizing you are doing it, looking at it, seeing it, and hopefully choosing a strategy in the future that allows you to minimize its effects.

On the other side of the coin, analyzing your pattern of trading and investing also allows you the opportunity to exploit your strengths to even greater advantage. You might find that you are doing one thing particularly well, that is adding some dollars to your investing each year. If you realize it, you might be able to figure out a way to take even greater advantage of it.

In an analysis of my own investing over the past year or so - done by looking at all my trades - I came to certain conclusions, some of which are as follows:

Right things:

• I accurately over-weighted my portfolio when I found a cheaply-priced (ie low pe) fast-earnings growing stock (but I could have done this even more, I see in hindsight);
• I accurately purchased additional position, when I saw a stock
  suffering from a temporary weaknesses.
  

On the other side of the field, some of my bad habits were:

• Bought too many micro-cap "story's", that lacked adequate net earnings and these returns impaired my overall return (and also increased my propensity to trade often);
• Bought some expensive (ie high pe) fast-earnings growing stocks, and that also impaired my returns.

The point here is that I've looked at both things I done right, and mistakes I've made in a considered way. In the future this should allow me to do, respectively, more of the first, and less of the second. Thus improving my overall investment returns. If you do the same, you'll see certain things you have done, or habits you have, that become more obvious to you. This allows you insight into your investing style and worries - thus providing you with the opportunity to raise your future investment returns by modifying your behavior.

A little more on this topic later ...

JW

The Confused Capitalist

Prepare a Battle (Investing) Plan

As I'd mentioned in my last posting, preparing even a basic investing plan can help to improve your results. Of course, this involves some thought and preparation of what type of investor you are, your age and tolerance for risk, and what you consider acceptable results over time. All of these will have some impact on the type of investments you would like to own.

Generally, the younger you are and longer your investment horizon, the more risk you can be willing to accept. This means that if you're age 30 or below, you should generally be looking to be fully invested in the stock market at most times.

Conversely, if you're 60+, you're probably going to be looking at owning some more conservative investments, including high-yielding stocks, and perhaps some bonds of various profiles. Whatever ... the point is that you spend some time thinking about where you are in your investment life, what keeps you awake at night, and how you think you can best achieve your goals, all things considered.

For instance, my plan this year was a five-pronged strategy and included:

1. Significant exposure to a few select emerging markets through ETFs,
2. A number of leveraged stocks (similar to the types I've written about recently),
3. Continued exposure to the oil and gas theme,
4. An allowance to buy some stocks based on "value screens" produced by others and,
5. Plus an allowance to allow me to continue investing in my favorite area - small cap stocks.

The point here is that I stopped to compare to what I did last year, consider the year ahead and what I think might be favorable themes going forward. While I might tinker with a variable here or there, at the end of the year, I think my themes will have been intact, and I can measure my results on that.

I also took one more step that I recommend for others - I wrote down what could mentally and emotionally go wrong with the plan - and if I have "reason" to consider wholesale changes against my plan, then I can go and read what I've already written about danger areas - thus probably comforting me to "stay the course". While my plan won't fit most other people (we're all unique individuals), doing a plan like this will! Good luck with yours ...

JW

The Confused Capitalist