Dear Investment Portfolio

Dear Investment Portfolio

Dear Investment Portfolio, we’ve been together awhile now, almost 10 years. A lot of stocks have come and gone during that time leaving their inevitable impressions. Some I should have never sold while others should not have been bought in the first place. But that is how you and the market have taught me. I had to go through those hard lessons in order to grow and develop into the investor I am today. That’s not say I have reached the summit of market knowledge. I’m sure there they will be further lessons to absorb in the future. The investing experience is really a work in progress.

I have seen you bob up and down on the surface of the market as I recorded your weekly values over time. And with those ups and downs I have learned how to compose myself during the storms that can come and go in the marketplace.

You have taught me that you are really just an extension of myself…no its more than that, you are a projection of what is going on inside of me and a way of keeping score so that I can keep track of what I have learned so far.

You are unique because there is no one else quite like you out there. Maybe more than anything else you have taught me the value of extending my time frames and spreading my risk.

You are something I have created, and over time I have seen you develop a faith in myself and the universe that in the long run everything will be okay.

Core Holdings and Portfolio Management

Core Holdings and Portfolio Management

Okay, it’s the spring of 2015 and you can see the stock market has far more risk in it than reward. You hold say 20 stocks. You have the bulk of your money invested in some solid dividend growth stocks. These are your core holdings. The types of stocks you want to hold on to. Why? Yield on cost! Remember the post awhile ago about dividend growth investing. These stocks are providing you with a growing stream of income that should only increase in the years ahead. Your core holdings have a tendency to be larger in market cap (but in my case, not too large) more established in their markets, and are the cornerstones on which your whole investment portfolio rests. They are like old familiar friends. You know in the long term you can count on them on being there.

This leaves everything else. You may want to lighten up on some positions or sell others outright before the market deteriorates further. Try to focus on the stocks in your portfolio that don’t pay a dividend. If you’re right about the risk in the current market place, you might be able to buy some of them back at more attractive prices. I know this sound’s like market timing but I urge you not to think of it that way. Focus on the risk that presently exists in the market and act accordingly. Maybe sell or pare back on your non dividend paying stocks that are over extended (way above their long term moving averages).

This is more of an art form than anything else and once you gain some experience in the market the process will become clearer to you. My advice is not to rush (like I do sometimes) and take your time and enjoy the journey because that is what it is.

One more thing. This selling or lightening up on positions to manage your risk is strategic and long term in nature. Most of the time investing involves just sitting tall in the saddle while you mosey on through town. If you cut down on the number of decisions you make you will find yourself making less mistakes and going through less stress in the process and that can only be a good thing.

Portfolio Management, Concentration or more Diversification

Portfolio Management, Concentration or more Diversification

  

There are two investors. Investor A runs a concentrated portfolio of five to eight stocks. He does all of his own due diligence. He accesses sedar.com and reads the annual and quarterly reports of the companies he's interested in. He inputs the companies metrics and ratios into a spreadsheet looking for trends over the last few years of the company's performance. He goes over the proxy statement and reads the bios of management and collects info on their compensation packages. He reads the M,D&A in the annual report to get management's views on where the company is headed and how they are going to get there. He reads the various press releases about the company published on sedar. He visits the companies' website to see if he can glean further clues about the prospects of the firm. He may even contact the company's customers and suppliers (fischer's scuttlebut) to gain further insight in how this company is viewed from the people they do business with. This investor still has to deal with his own psychological makeup as well as make sure he has a margin of safety when he buys his stocks. All of the information he has gathered about the companies he owns is his way of managing his risk. And finally he tries to take advantage of wager value in exploiting the market's inefficiencies and underused information. I'm almost out of breath just writing about all of this. Investor A in some strange way loves doing all of this. It is his process. He focuses on his process rather than the outcome. He likes to be in control and in charge of his destiny and his affairs. 

Investor B prefers to steal/borrow his investing ideas from other people (fund managers). Rather than handicapping the company he spends the majority of his time investigating the fund managers he wants to follow.  He insists that they run small concentrated portfolios with low portfolio turnover. He may even do some due diligence of his own but it will be at a much reduced scale than that of Investor A. He is more likely to visit morningstar's website to get the information about the companies he's interested in. He is a big believer in utility (putting in little while getting back a lot). He too will have to consider his psychological mindset, there is no way around that. Psychology trumps everything else put together. He will also insist on a margin of safety in the price of the stock he buys. He will handle his risk management by holding 15 to 20 or more companies to compensate for his lack of knowledge of the stocks he's holding in his portfolio. He will exploit the randomness in the market knowing that some of his stocks will do well over time and some won't. He is not bothered by this, he knows that even the best investors are only right about 66 percent of the time. He is out to make money over the long term just as Investor A is but he handles his risk in a different way. And he will use wager value in following fund managers who invest in the small to mid cap space where market inefficiencies are more apt to be found.  

There could even be an Investor C whose approach lies somewhere between the extremes of Investors A and B. The market is a multi-faceted place where there is no silver bullet. Every investor has to find the approach that is right for himself.

Risk Management

Risk Management

Suppose you bought  just one stock and put in your investment portfolio and held it for six months. Randomness (the role of luck) would play a huge role in the outcome of your investment. But if we apply a little risk management we can help mitigate our risk. We could buy three different stocks and hold them for a year. By increasing the number of stocks in our portfolio we have decreased the role of randomness in our investment outcome. And the longer holding period will further weaken the role randomness will play in our investments. The more stocks you add and the longer you hold them will further reduce your risk but it will reach a point of diminishing returns where you will be holding too many stocks and it will reach the point where it will reduce the return on your investments. So you have to find that balance between the two extremes. For me in my world I find holding 15 to 20 stocks pretty well manages the risk of being in the market, and the longer you hold them (time diversification) another type of risk can be eliminated as well. The number of stocks you hold in your investment portfolio will be a product of your experience and your approach to investing so there is no magic number. It might be 8 for a person who does a lot of his own research and has the courage of his own convictions. It's more a matter of your risk tolerance and taste. In the end as in all things experience will be your guide.

In the beginning managing your risk will be very much an objective (left brain) activity but after you have the experience of being in the market a few years you will develop more of a subjective approach (right brain). Like the tennis pro who can place a shot just inside a corner, you will develop a certain “touch” and know when to over weigh a holding here and under weigh another over there, when to trim a little from this position and put a little cash aside. Like a chess master you will have a “feel” for where to put your pieces and when to do it.

Portfolio Management

Portfolio Management

Rule Number One. Keep your investing money separate from the money you need to live on. There is an old racetrack saying, ‘Scared money never wins’ and it is the truth. In other words don’t bet the rent money on the horses or the stocks.

There is a lot of talk about asset allocation in the financial world. I largely ignore it. If you are a passive index investor it does have some merit but if you are a stock picker like me you don’t need it. This world is filled with two types of people, 95 percent of them want take your power away from you (the church, the medical world, the financial world, the media, and probably the government as well) and there is maybe 5 percent who want to empower you. Generally they will not sound like everybody else and tend to go their own way. I say this to warn you about the financial industry. There is just so much bad advice going on out there. Look at it this way, you go to a party and say pleased to meet you while at the same time you’re thinking what an asshole. You say one thing outwardly but are thinking something different inwardly. This applies to all of us as individuals but more importantly it applies to all the so called organizations of the world (governments, financial institutions, medical establishment, the church). They all say one thing but are thinking something else. Think about how the big Banks all talk about the great service they provide you with while they hit you with hidden service charges. So take what the financial world tells you with a grain of salt. End of paragraph.

Take your investing money and separate it into two piles. One pile will be to buy stocks with while they other will be in cash. If you’re a conservative careful investor you might want to have 50 percent in cash and 50 percent in stocks. If you are more aggressive it might be 10 percent in cash and 90 percent in stocks. The Current Market Environment discussed a few posts ago will guide you in this area. And forget Bonds. They are not setup for the small retail investor. Just my opinion of course, if the markets are looking rocky you may want to hide out in a bond ETF for awhile, it’s up to you. Let experience be your guide as it has been for me.

Another thing is to spread your risk. You do not want to put all your money into three stocks. You need to diversify your holdings but you don’t want to over diversify either. I would say you should own at least 10 stocks preferably more to be properly diversified. And you would want them in different industry groups as well. I personally hold 22 stocks in the financial services, industrial, tech, energy, commercial real estate, infrastructure, healthcare, manufacturing and food exporters areas etc…and each industry group will have sub groups within them. I also own several Master Limited Partnerships. It all comes back to spreading your risk because random events can occur disrupting your portfolio so you have to have it structured so you won’t be shaken out of your holdings.

I have most of my money in what I feel are my best ideas so my portfolio does not have an equal amount invested in each position. When you start off you probably don’t want to do this but as I have said before let experience be your guide. As you gain more experience you may want to weight some of your holdings heavier than others.

And lastly all of my investments are in Canada as I find Canada to be a fairly inefficient market. Some will tell you, you have to be invested globally but as many of my companies do much of their business abroad I already have global exposure. I guess that’s it. If I’ve forgotten anything I will talk about it in future posts. The first 5 posts I’ve done pretty much encapsulate my approach to the markets so far but I am still learning.

This is my 5^th post in two days after starting this blog yesterday. I have looked upon what I have done and it is not bad but I am tired and will rest even though this isn’t the seventh day. 

We are at the Post

 We are at the Post

Investing in the stock market involves using both sides of your brain, the left (reasoning logical side) and the right (intuitive feeling side). As your knowledge base expands your feeling intuitive side will play a much bigger role in your investment decisions. My advice after being in the market a number of years is do not rush and try to learn everything at once. Take your time and learn it bit by bit and enjoy the journey. Investing in the market will offer you many rewards but it will test you at the same time. It will shine a light on your character weaknesses and expose them to the light of day. I think this is all part of the learning process we all must go through.

As I believe we create our own reality, whatever happens in our lives and in our investing is a reflection of what is going on inside of us. A person who is willing to examine himself and his own behavior will do better in the market and maybe in his life as well. If we do create our own reality as I believe, our thoughts and feelings are the tools we use to carve out our existence as we know it. Since the Stock Market is the sum total of all of its participants it is the result of everyone’s consciousness. This would make it an ideal barometer of raw emotion and feeling. You can see this in the market as Fear and Greed as the market swings wildly from one extreme to the other. As it moves through these extremes it presents the self-aware investor with opportunities to make good long term investments at attractive prices.

It’s been my experience so far that investing in the Stock Market involves

1)      Psychology  (what’s going on inside your own head)

2)      Current Market Environment  (what's going on inside the market's head)

3)      Stock Selection

4)      Portfolio Management

I’ll discuss these topics in future posts. The market is essentially a discounting mechanism, it represents the sum total of everybody’s information (left brain) and feelings and emotion (right brain). At times of extreme market behavior (fear and greed, oversold, overbought) it pays to be contrary and do the opposite of what everybody else is doing. Sort of what George did in the old Seinfeld series (my favorite episode by the way).

I guess that’s all for now. I decided to write this blog as sort of a diary to myself. Maybe somebody out there in cyberspace will benefit from it as well.