Ten Habits We Follow When Managing Your Money
Know the most tax efficient way to manage your investments is to hold the winners and let them run, and to sell the losers quickly. With this philosophy, you learn to fail fast and hold the strong stocks that carry the potential to be home runs. Losses in the stock market are unavoidable by anyone who invests long enough, but long-term gains and short-term losses are far more tax efficient over time.
Pay particular attention to what’s happening with an industry. Numerous academic studies have proven time and again that sector/ industry considerations are an important considerations in individual stock selection. Owning the worst stock in the best group can potentially yield better results than owning the best stock in the worst group.
Understand investing is very much like calling plays as a football coach. Any successful football coach realizes that there is a time to play offense and a time to play defense. Likewise, a good coach knows the types of personnel best suited to play either offense or defense. When the market sends the defensive team onto the field, portfolio strategies should be focused on preserving wealth. When the offensive team is on the field, portfolio strategies should be focused on wealth accumulation.
Maintain a disciplined approach. Whether you are trying to improve your golf game, trying to shed a few pounds, or trying to manage a successful investment portfolio, you must adhere to your discipline. Just as there are numerous ways to diet successfully, there are many different strategies that may work on Wall Street. But in either case half-measures can yield unsatisfactory results. Find a philosophy you believe in, and that suits your temperament, and then stick to the game plan.
Realize that value is a relative term. Just because something is a “good value”, doesn’t mean it’s suitable for you. Something is a good “value” when it meets all of your investment criteria and also represents a suitable risk-to-reward scenario at its current price.
Never rely on the financial news media for investment advice. The job of a good media outlet is to sell magazines first, and advertising second; being correct in their financial analysis is tertiary to items one and two. As such, magazine covers can be utilized as a contrary indicator because investment returns are predicated upon being able to gauge what’s most likely going to happen in the market, not what has already happened.
Recognize that trends change and stocks and sectors rotate into, and out of, favor just like produce in the supermarket. We buy winter squash in the winter and summer squash in the summer. Because sectors rotate in and out of favor, this requires an investment approach that favors a rotational strategy over a buy and hold philosophy, and one that is adaptive to market conditions.
Understands that the best buying opportunities in the stock market may come when it is most difficult to buy. Likewise, the highest degrees of risks in the stock market, or any other market for that matter, may exist when the majority of all investors are bullish. Your investment plan should incorporate some type of tool that encourages you to buy when others are skeptical, and to trim portions when the market is replete with optimism.
“The market can remain irrational for longer than we can remain solvent” – John Maynard Keynes. If there is one thing the stock market teaches us, it is that there is always someone out there with a little more inside information, a little less barrier to entry, a little more margin and a little more equity. When we break the market down to the lowest common denominator however, price movement is quite simply a function of supply and demand. When there are more buyers than sellers willing to sell at a particular price, the price will rise. If buying and selling is equal, the price will remain unchanged. All of the insiders and market makers come together to determine price movement of stocks, and thus a logical, organized method of recording that price action will let the world know the sum of all new buying and selling. When supply takes control of a situation, have the fortitude to sell.
Never confuse brains with a bull market. A strong market will lift stocks to the degree that a strong tide lifts boats…in mass. The market has humbled Nobel laureates and Mensa members alike, successful investors are the byproduct of successful investment approaches. The market will yield strong trends and weak trends alike, an adaptive approach will allow you to manage risk in bad markets and grow wealth in good markets. Bernard Baruch once said, “Become more humble as the market goes your way.”
Reprinted with permission from Dorsey, Wright, and Associates, LLC