Rookie no more

One of the many benefits that accrue from writing Invest-notes is spending time every week thinking about the economy and its impact on my personal finances. This, in turn, creates a paper trail of my thoughts, documenting the evolution of how and why I make investing decisions. The hope is that this exercise provides demonstrable proof of improved performance. So I share the following observation as a reminder of how much my thinking has changed and not as a criticism of another person on a similar journey.

Following a news link from a stock back on my watchlist (NLY) led me to a Motley Fool article. Long story made short, last summer an investor-blogger bought a $10,000 portfolio of ten high yielding stocks and this post was an update of how his portfolio was faring. He was using SPY (an exchange traded fund that tracks the S&P 500 index) as a benchmark, and at this juncture his portfolio had delivered a bit less than one percent while the S&P was up a bit more than 4%. These figures include the value of dividends, which is essentially the point of his experiment. Though he didn’t include this information, I calculated that his portfolio has an average yield of 6.9% compared to about 2.5% for the S&P. Even in a down market, he should be able to outperform the S&P.

The déjà-vu hit me when I read the following: “Given the massive move down in shares of Frontier over the last few months, I’m strongly considering reinvesting the money there.” The ‘massive move’ he mentions was a 45% drop in the stock price. The money he plans to reinvest are the dividend payouts he’s received so far. And this comment was sandwiched between two other lines. First, “But I’m confident in the long-run nature of this portfolio, and I fully expect it to outperform. If we see a downward move in the S&P, we’ll quickly gain the upper hand again, I think.” And, “Without its truly horrific performance — down nearly 50% since late June — the portfolio would be clearly better than the market.”

Now, for his portfolio to just break even the stock he’s ridden down has to double in price. If he’d had an exit strategy – I typically use a 20% decline as a trigger to sell a stock gone bad – he would now be ahead of the S&P and in a position to reinvest the sale proceeds and the dividends in one, or all, of the four stocks in his portfolio that are trending up. Further, assuming that it will take a market move (and I am unclear why a down move is desirable) for this portfolio to perform means there really isn’t an investment strategy beyond hope.

I have made this mistake – to chase the losers instead of the winners. I have made this mistake – to assume a market move is forthcoming and will save my ass. I have made this mistake – believing the long term will make my decisions good ones. Thankfully, I’ve learned to buy stocks on the way up and cut my losses when it is obvious my assumptions have been trumped by Mr. Market.

Oh, yeah, I bought a few hundred shares of NLY this week.

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2 Responses to Rookie no more

  1. rick grinnan says:

    Excellent advise!!!! However unfortunately I’m still working on DISAPLINE which is my downfall, with your ending remarks there is hope for me and I plan to put that into action this week. Thanks for the reminder.

  2. Frank Gaard says:

    Chris. I have been thinking about you and your crew down there in the heat.
    I have been very busy our [ The Immortal Man Bag Journal of Art ] has been slow coming to Amerika. Talked to Stu Mead last night on Skype for a while we talk very often. I write him and it’s hard for him to write because of his disability so he calls me when he gets a letter. We received 2 sample copies of the book from Ivan Meci a while the book has an intro that shows the blending of the Artpolice project into the Man Bag and other book projects including Mike Brehm’s StoryHead and Silberstein’s Losing Faith zine. etc. My feet are sore today . Stu gve away one of his copies to a pretty girl who was visiting him when the 2 books came. He’s such a mensch, I have somethings to send samples of the stories we wrote which you’ll get eventually . Just wanted to say Howdy and tell you I admire your blog. Wish I was such a writer as you instead of an old storyteller. My grand daughter turns 3 Saturday Bar-B-Que at Max’s house that boy can cook. xx oo Frank

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