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Investing New Years’ Resolutions
By: Cabot Heritage Corporation
There are many things I enjoy about the stock market, and one
of them is the fact that the slate is wiped clean at the start of
every year. In a way, it's like a sport-there's a big
scoreboard that, at the end of the day, is how we measure our
performance. Once the game is over, it's on to the next
one. There's no carryover effect.
In other words, it doesn't matter how you did last year in the stock market-whether you made 50% or lost 10%, that performance really has no bearing on how you'll do in 2011. That's why they call it a new year! So whether you're overjoyed with 2010's performance, or disappointed, it's all about putting last year behind you and starting from scratch as 2011 dawns.
On that note, I want to list a handful of New Year's resolutions for investors-some are relatively basic, but all are useful and should keep you on the right track this year.
#1: I will track my performance.
I am starting to take up golf (just got a set of irons for Christmas; can't wait to test them out), might take a lesson or two this spring and play a few rounds this summer. It's a hobby for me. I enjoy it. But the fact is ... hobbies cost money.
For golf, the expense is know, and I judge it worthwhile. But if you treat investing as a hobby, it will cost you more money than you expect. Thus, try to be more professional about it-no one's saying you have to obsess over every penny, but creating a basic spreadsheet that enters weekly or monthly values for your portfolio (and adjusts for money you put in or take out) is necessary to know exactly how you're doing.
After all, if you know how you're doing, you have an idea of what (if anything) needs to be changed. But if you don't ... well, you're likely to just dabble in a couple of stocks that will eventually cost you money. So if you haven't yet, put together that spreadsheet and start tracking your results.
#2: I will not allow any one stock to do great damage to my portfolio.
I realize that, while I'm all about growth stocks, you might have a mix of growth, value, dividend payers, and so on in your portfolio. And with some of those non-growth stocks, you don't have to be an adamant loss-cutter as you do with growth stocks.
But whatever system you're using, you want to make sure that no one or two stocks ever does great damage to your portfolio-that means making sure losses don't get out of control, and it also means you won't put a huge chunk of your portfolio in one security. In other words, watch your risk!
#3: I will not take positions that are "too small" to matter.
Many individual investors I talk to will talk about some winner they own, saying "yeah, I bought 200 shares of XYZ around 20 per share; now it's up to 40!" But then, after a few minutes, they mention how their total portfolio is worth $400,000.
So let's do the math-200 shares of a $20 stock equals $4,000 ... which is exactly 1% of the total $400,000 portfolio. So this investors' reward for doubling his money in this stock is that his portfolio gained a whopping 1%. And that's likely before taxes!
Not only does setting a minimum position size help emphasize your winners, it's also likely to boost your winning percentage-knowing that every position counts, you're less likely to take flyers on total speculations, many of which don't work out. Instead, you'll concentrate on your best ideas.
So what's a good minimum position size? It's really up to you, but I would say smaller than 4% and you're getting close to meaningless. Some aggressive investors won't go below 5% to 10% .
#4: I will consider the tax impact of my stocks BEFORE, not AFTER, I purchase a stock.
Most people buy a stock, ride it, and then somewhere down the road start thinking of the tax impact (taking the profit or the loss). But what you should do instead is take that into account before you buy a stock ... which will lead you to take larger position sizes. Here's how.
Let's say that you know from your history that 95% of your trades are held for less than a year, and let's also assume that, over time, you're going to make money at this. And let's also say that your combined short-term capital gains tax rate is 30%.
Knowing this information, you'll know that 30% of any gains or losses you take over the long-run will be snatched by Uncle Sam. (Yes, one year, you might have "too many" losses to deduct them all, but they'll carryover to the next year.) So if you made/lost $1,000 on a trade, you really only made/lost $700.
Because of that, you can take bigger positions than you would otherwise. If you're comfortable losing, say, $700 on a bad trade, you can actually lose $1000 and it's a wash. Sorry about all the math, but the bottom line is that you should think about this stuff before you trade, not afterward; remember that, in the end, it's AFTER-TAX profits that count, not pre-tax profits.
#5: I will focus on the process, not necessarily the results.
OK, OK ... you're obviously going to focus on your results (that's what I wrote about in #1). But at the end of the day, every system, no matter how sound, is going to have good periods and bad periods. So when evaluating how you are doing, you need to focus on how well you followed your rules, not necessarily whether you made money in a given week or month.
For example, sometimes you might follow all your rules, yet lose money. That's OK; the goal isn't to make money on every trade (impossible), it's to put the odds in your favor on every trade (very possible). If you focus on doing that, you'll avoid some of the emotional decisions every investor makes ... most of which lead to losses.
#6: I will take some of my profits on the way up in price.
I've written and even chatted (via a Chart School video http://www.cabot.net/Videos/Cabot-Chart-School/2010/CCS-122010.aspx ) about this a lot, so suffice it to say that if your sole selling tool is waiting for a stock or the general market to pull back sharply, you can probably do better by selling some stocks (or portions of some stocks) on the way up in price, booking some profit while everything is rosy.
#7: I will focus on only the very best set-ups, stocks and stories I can find.
We all dream of striking it rich and feeling smart by latching onto some small, unknown name with a great story and riding it for a quick move higher. But these stocks are like lottery tickets, and they occasionally give us a thrill-but over time, just cost us money.
Thus, instead of thinking "if I had only bought XYZ stock ... " think about "if I had only avoided a handful of trades, look at how much better my portfolio would look!" Be more selective-oftentimes the best investors spend weeks doing nothing, only to pounce when the true high-probability set-up arises.
I could go on, but we all know how hard it is to keep just a couple of real resolutions, never mind seven, eight, 10 or more. So I'll leave it at that. Printing out this list and keeping it near your computer should help you stick with some of these throughout 2011.
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For my stock idea in this Wealth Advisory, I'm actually going to go with two ideas, both from the same industry ... staffing. That's right-despite all the talk of our jobs recession, I think there's a good shot that the job market is going to pickup in a big way during 2011. And that view is bolstered by the action of some of the top stocks in the group.
In particular, I like both Monster Worldwide (MWW) , operator of the Monster.com job search site (it's become a huge global brand), and Korn Ferry (KFY) , which is more on the executive recruitment side of things.
Korn Ferry has actually been showing some pretty stunning growth, with sales up 55%, 49% and 32% during the past three quarters, and earnings leaping 267% in the latest quarter. The stock catapulted out of a base four weeks ago and is tightening up in the 23 area. I think it's a decent buy here, but note that the stock is thinly traded, so expect some volatility.
Monster Worldwide has yet to see business really accelerate, but in the prior quarter, management mentioned that advanced bookings-a reliable sign of future growth-were at the highest levels in quite some time. The stock has been pausing just south of 25 for a few weeks, and while a shakedown to 22 or 23 isn't out of the question, I think it's poised for higher prices.
All the best,
For Cabot Wealth Advisory
Editor's Note: Mike Cintolo is Vice President of Investments for Cabot, as well as editor of Cabot Market Letter, a Model Portfolio-based newsletter of the best leading growth stocks in the market. Thanks to top-notch stock picking and market timing, Mike's simple to follow and concentrated (no more than 12 stocks) portfolio has crushed the market by 14.4% annually since the start of 2007; he was up 24% in 2010. If you want to own the top leaders in every market cycle, be sure to give Cabot Market Letter a try.