The Care And Feeding Of A Portfolio

10/26/2009


I’m raising two children, but they’re not as troublesome as our 38 babies.

As this is an investment newsletter and not a gossip magazine, I’m obviously talking about something other than offspring. Check out the table of our recommended stocks on page 7. You’ll find 38 names.

Like children, the stocks are vastly different. Some perform exactly as expected, like my first son, who met most of the key milestones exactly when the books said he would. Some make you tear your hair out, like my second son, who has made it his mission in life to do the least amount of work possible and still be allowed to eat and sleep in the house. And some make you think seriously about putting them up for adoption. No, not the children. But most of us have troublesome names in our portfolios.

In many ways, tending a stock portfolio requires the same blend of discipline and creativity needed to raise well-balanced children. In the following paragraphs, I offer three tips on the care and feeding of a stock portfolio. They should come as no surprise to anyone who has gotten up in the middle of the night to change a diaper — or owned a stock that made it hard to sleep.

Always keep an eye on them: Any parent who has ever been separated from a child at a ballgame or a shopping mall knows that feeling of indescribable dread.

We keep track of our children because we don’t want anything bad to happen to them, either because of their own actions or someone else’s. We keep track of our stocks for much the same reason. The Forecasts was not immune to the credit meltdown. But by paying attention to falling Quadrix® scores and developments in the market, we limited the damage by downgrading Citigroup ($4; C), Bank of America ($17; BAC), and other financials back in 2007 and early 2008, before the worst of the credit crunch.

Give them some space to grow: The line between keeping an eye on children and keeping them under your thumb is mighty thin, at least according to my sons. But both parents and investors must walk that line without faltering.

My older son has begun trading baseball cards without bothering to learn how much they are worth. When instinct says to step in and make sure he does not allow himself to be cheated, reason says I should stop at encouraging him to do some research — even if he ends up selling a couple of hall-of-famers for a spare pencil and a bag of Doritos. We must also move beyond our first implulse when a stock disappoints.

Sometimes it’s wise to simply sell on bad tidings. But consider GameStop ($26; GME). It fell on disappointing profit news in August but later bounced back, outperforming the market since the announcement. GameStop should continue to reward patient investors.

Don’t expect miracles: Sure, we’d like our children to be prodigies, playing the piano or dribbling a basketball earlier than everyone else. But that’s not how it works. Very few stocks triple overnight, and investors who put too much time and effort into finding the next stock prodigy can end up poorer in both wallet and spirit. We at the Forecasts like three-baggers as much as anybody, but our goal is both practical and satisfying — simply outperforming the market.

Many parents believe they have achieved success when they send their children off to college with confidence that they will do well. I suspect most of those parents would also consider their investing efforts a success if, by using a disciplined strategy, they built up a portfolio that covers the cost of that college journey.


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