Over the past year Netflix (NFLX) has traded as high as $304 per share. Today it trades around $74. Over the past year Green Mountain Coffee Roasters (GMCR) has traded as high as $115 per share while today it is trading around $27. Need we say more? Investors need to establishe a disciplined approach to investing to avoid the big mistake. For this reason, we focus this column on establishing guidelines for your investment portfolio.
Shortly after the terrorist attacks back in 2001, Francois Sicart, the Chairman and Portfolio Manager of Tocqueville Asset Management stated that it was “in times like these, unemotional, contrarian thinking and a strong sense of value can be a long-term investor’s best assets.” Mr. Sicart further stated that “most likely, this is the greatest gut check any investor is going to see in their lifetime. However, these are the times when the greatest opportunities also exist.”
Not surrendering to your emotional desire to sell after 9-11 paid off handsomely for stock investors. Or, more to the point, sticking to a strict set of buying, and more importantly, selling disciplines, has paid off handsomely for stock investors. As in life, more often than not, stock investors that set and follow guidelines, fare better than those that do not. The following are some disciplines that may help you in managing your investment portfolio.
Buy and monitor is a much better investment strategy than buy and hold. It was early 2007, pre- financial market meltdown, when General Electric traded hands above $40 per share but then subsequently plunged over the balance of 2007, through 2008 and early into 2009 when GE finally bottomed at approximately $5 per share. Clearly investors would have been wise to unload shares of General Electric at some point. The lesson learned is that no company is free from stock price risk! This brings us to our next discipline.
The minute you buy a stock, establish a price below your purchase price at which you are going to sell. This strategy will help you protect your principal, your most valuable asset when it comes to long-term growth of assets. Furthermore, it will remove the emotion out of determining when to sell. Emotion (as well as ego) is the greatest threat to your financial health and wealth because it replaces intelligent investment disciplines with hope! When clients call asking about the stock of a particular company that they do not currently own, we often tell them that “it is more important what and when you sell, rather than what you buy.” Predetermining a downside threshold for pain helps to protect your principal. This makes sense to us.
If you buy a stock and it moves up, move the price at which you were going to sell up in order to assure yourself that you will not lose money on this investment. For example, if you buy shares of ABC Company at $20.00 and place your original sell order at $17.00 (technically called a stop/loss order), move the stop/loss order up should the shares of ABC Company rise to say, $22.00 or $23.00 per share.
Buy stocks that are on the way up, this way you have a better chance of protecting your principal. If you buy stocks on the way up, there is a good chance that you have not purchased these shares at the exact top. Should the stock run-up a couple of points above where you purchased it, move your stop/loss order up to your purchase price, once again guaranteeing your principal for this investment.
We can’t emphasize enough the benefit of established rules when investing. Making sound investment decisions accomplishes a couple of things, it replaces buying on greed or selling on fear, helps protect your principal and it helps you sleep at night because it removes the emotion from the decision making process.
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May 30, 2012 - Morning Commentary
Wednesday, May 30th, 2012VOLATILE - tending to vary often or widely, as in price. Inconstant, fickle. These definitions of “volatile” can certainly be applied to the stock market and we thought that seeing the definition in print was a good idea as it does not specifically pertain to one direction or the other. For example, when the stock market moves wildly to the upside it can certainly be described as volatile just as accurately as if it had moved to the downside.
Expect more volatile days throughout the Summer as investors deal with issues outside the United States (Europe, China, etc…) as well as inside (the Presidential Election, dealing with the debt ceiling, expiration of Bush Era Tax Cuts). However, we believe that within reason, adding to equities on the volatile DOWN days makes some sense. Continue to move toward companies with dominant market positions selling at reasonable valuations. If you are investing in mutual funds, look for large-cap dividend paying funds that will cushion the blow should stocks move downward.
Regarding fixed income, it is more of the same. Add to positions. Keep your duration less than ten years and mix in high-grade and low-grade corporates with U.S. Government Agency Bonds. Use U.S. Treasuries for stability.
The bottom line — everything in moderation.
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