Good portfolio management is difficult, while poor portfolio management is almost effortless! In the spirit of David Letterman’s Top Ten list, here is my contribution to the genre of things to avoid, with a special nod to our brand of investing. I made a version of this presentation originally at a 1996 Dorsey Wright Broker Institute.
THE TOP TEN WAYS TO SABOTAGE YOUR PORTFOLIO
1. BE ARROGANT. Assume your competition is lazy and stupid. Don’t do your homework and don’t bother with a game plan. Panic if things don’t go well.
2. WHEN A SECTOR OR THE MARKET REVERSES UP, WAIT UNTIL YOU FEEL COMFORTABLE TO BUY. This is an ideal method for catching stocks 10 points higher.
3. BE AFRAID TO BUY STRONG STOCKS. This way you can avoid the big long-term relative strength winners.
4. SELL A STOCK ONLY BECAUSE IT HAS GONE UP. This is an excellent way to cut your profits short. (If you can’t stand prosperity, trim if you must, but don’t sell it all.)
5. BUY STOCKS IN SECTORS THAT ARE SUPER EXTENDED BECAUSE IT’S DIFFERENT THIS TIME. Not.
6. TRY TO BOTTOMFISH A STOCK IN A DOWNTREND. Instead, jump off a building and try to stop 5 floors before you hit the ground. Ouch.
7. BUY A STOCK ONLY BECAUSE IT’S A GOOD VALUE. There are two problems with this. 1) It can stay a good value by not moving for the next decade, or worse 2) it can become an even better value by dropping another 10 points.
8. HOLD ON TO LOSING STOCKS AND HOPE THEY COME BACK. An outstanding way to let your losses run. Combined with cutting your profits short, over time you can construct a diversified portfolio of losers and register it with the Kennel Club.
9. PURSUE PERFECTION. There are two diseases. 1) Hunting for the perfect method. Trying a new “system” each week will not get you to your goal. It requires remaining focused on one method, maintaining consistency and discipline, and making incremental improvements. 2) Waiting for the perfect trade. The sector is right, the market is supporting higher prices, the chart is good—try to buy it a point cheaper and miss it entirely. Doh. Better to be approximately right than precisely wrong.
10. MAKE INVESTMENT DECISIONS BASED ON A MAGAZINE COVER, MEDIA ARTICLES, OR PUNDITS. Take investment advice from a journalist or a hedge fund manager talking his book! Get fully engaged with your emotions of fear and greed! This is the method of choice for those interested in the fastest route to the poorhouse.