Winning Trades Sometimes Require Patience

Yet even the most talented investors go through losing periods. Eddie Lampert, Bill Miller and Jim Simons, for example, are just a few of the highly regarded and successful investors who have posted severe losses in recent months. Although I don't much believe in their respective styles, I can empathize with the reality of volatile markets: We'd all love an investment that always beats the averages and never has a losing month, but to my knowledge, it simply doesn't exist.

Whether you pick your own investments or allocate to a number of managers, from a portfolio perspective one solution to dealing with the inevitable losing spell is to stagger your exposures and strategies over several months. I call this diversification by time. By trickling out capital over an extended period instead of at one particular moment, you can essentially limit your risk to any one particular market cycle. As some ideas, like precious metals, are starting to wilt, others, like Japan, are just beginning to bloom. Your entire capital reserve isn't allocated based on one day's analysis.

That analysis should be primarily centered on the price action of the securities themselves. To that end, I look at a lot of charts, not for obscure mathematical calculations, but simply to get a broad sense of the market's major directions and trends. So I'll pull up motion-picture stocks like Regal Entertainment Group (RGC) and Cinemark Holdings (CNK) to see how they're weathering the storm (not well) or check in to get a sense of how the utilities like Nicor (GAS), NSTAR (NST) and Northwestern (NWE) are performing (much better). It's my belief that, at least for new money, attention should be focused on areas of the market that are outperforming. Essentially you water the winners and let the losers die in the vine.