Be Patient With Your Portfolio

As a child growing up in the 1980s, I was utterly fascinated by the plasma globe, a novelty lamp first introduced by Sharper Image in 1987. A trip to the mall wouldn’t be complete without nagging my parents to let me stop by the store and play with it for a few minutes. I imagined having one of my very own.

Now, with 20 years hindsight, I can see what a downright foolish impulse it was to covet such a useless toy. The plasma lamp was undoubtedly cool, but with limited utility, especially for a 12-year-old boy.

It takes a certain level of maturity to realize that you can enjoy and appreciate something without owning it. Even now, I admire the precision engineering and design of the Audi TT, but don’t necessarily need to have one parked in my driveway.

The same sort of discipline should hold true in your portfolio. With markets having rallied sharply since March, investors now sitting on piles of cash are eager to get in the game. And while many stocks and sectors look attractive, the astute investor must concentrate only on his top ideas—whatever they happen to be. You simply can’t buy everything that that looks good and moves.

For example, I’m in awe of many of the advancements being made in solar technology within companies like First Solar (FSLR), Suntech Power (STP), SunPower (SPWRA). Yet in my portfolio, given my risk budget and existing holdings, I simply don’t have room right now. As much as I admire their technology and potential, they’re simply not on my list of must-own names.

One reason is that my first loyalty is always to the positions already held in my portfolio. On the rare occasion trades actually end up working out, I think you should do your darndest to actually stick with them, exactly why many of my previous favorites, Japanese names like Kubota Corporation (ADR) (KUB), Konami Corp. (KNM), Sony (SNE) and Mitsui & Co. (MITSY) have been held or even added to as equities have rallied. 

Between stocks, funds and ETFs, there are always a number of investment ideas that catch my eye. But because you can’t bet on everything, you must narrow down your favorites. You might appreciate a stock but simply not buy it. So pick your top names and leave the rest by the side of the road.

When I speak with individual investors, they frequently show me a portfolio of stocks in which, these days, many happen to be held at a loss. Indeed, the agonizing quandary most of us deal with is not about which new stocks to buy, but what to do with the ones we already own.

What I don’t advocate doing is waking up one morning and dumping positions, even those held at a loss. Markets have a way of playing us, and the minute we decide to liquidate our holdings is inevitably the moment they decide to jump higher.

Instead, I suggest using stop-loss orders, placed below the current market price, and essentially letting the market determine if I should continue to hold or take my lumps and move on. This can be especially useful in markets such as we are now in, where stocks have rallied sharply off multimonth lows.

One a trade is made and shares are in your portfolio, you might think of it as a horserace where the ponies have left the gate and are already galloping around the track. At that point, all the research and analysis in the world is moot. Keep your emotions out by putting your stop loss orders in. When it comes to holding on or moving on, let the market itself decide what direction you should take.

As investors, we have a perverse love for low-priced stocks. There’s something bizarrely satisfying about buying thousands of shares of a Citigroup (C) or RRI Energy (RRI) for no other reason than they are low priced. This is exactly the fallacy that hurt so many investors in Sirius (SIRI), a once-$40 stock that, earlier this year, hit an all-time low of five cents a share.

At the same time, we shun high-priced stocks as being “too expensive,” even knowing that stock price is essentially arbitrary. Through the use of stock splits or reverse splits a company can set the price of its stock virtually anywhere.

To that end, the true contrarian might be the investor who seeks out strong, high-priced names knowing that average investors would almost never consider a $100 stock, simply based on its high price.

Earlier this year we profiled the Nasdaq OMX Government Relief Index (QGRI) and the Ethisphere TARP Index, both designed to track the results of the government’s bailout efforts.

Now Dow Jones is getting into the act. The Dow Jones U.S. Economic Stimulus Index is designed to measure the stock performance of companies expected to benefit from the bailout program, as opposed to companies that are actually bailed out.

The 50-name index holds approximately 38% in industrials, 18% in technology at 15% in utilities, with major components including Freeport-MoMoRan (FCX), McDermott International (MDR), Nalco Holdings (NLO) and Google (GOOG). It is up 10% over the past three months. Can a bailout ETF be far behind?

“In those days, when grown men with families to support were reduced to selling apples on street corners, any job, no matter how little it may have paid, was considered precious.” That's by David Feldman, writing about his experiences as a stockbroker during the Depression in “The Ups and Downs” (Fraser Publishing, 1997).