The Globe and Mail Strategy Lab is now one year old and I’m happy to report that my model growth-investor portfolio is up more than 90 per cent.
I’m gratified, of course, but I think any one-year return is highly misleading. Too much depends on chance. My success over the past 12 months doesn’t make me better than anyone else.
But at least it provides me with a podium to pass on a few investing lessons that I’ve learned over the years. Let me offer three thoughts that may help you with your own investing:
No strategy works all the time
Growth stocks have been hot this year, but I’m keenly aware that every stock I own could tank tomorrow. I don’t expect this will happen, but I live in a volatile world of technology stocks.
My biggest winner, Netflix Inc., is up more than 400 per cent while my biggest loser, Apple Inc., is down more than 30 per cent. Amazon.com Inc. and Rackspace Inc. both declined heavily soon after I added them to the portfolio.
I expect that my long-term approach and the diversification within my portfolio will compensate for such missteps. But I could easily trail my Strategy Lab colleagues if a few stocks move in the wrong direction.
So don’t take my one-year record as evidence that you should rush to adopt my growth approach. If you don’t like volatility and have no interest in technology, find a strategy that resonates better with your personality and interests.
It’s worth noting that all four of the Strategy Lab portfolios – growth, value, dividend and indexed – have grown at least 9 per cent this year. That’s a healthy return by any standard. I fully expect there will be years to come when these other strategies will perform better than my growth approach.
Buy a business, not a stock
Cynthia, a reader, e-mailed me last week asking, “Are you planning on doing any trading in the near future or are you just going to ride on your success so far?”
The answer is that I will trade, but sparingly. Over the past year, I’ve sold shares of Sprint Corp. following the majority acquisition by SoftBank Corp. I’ve also added new positions in Priceline.com and DragonWave Inc.
I doubt you’ll see me change the plodding frequency with which I trade. I prefer to act like I’m an owner of the business rather than a short-term speculator. Not only does that give me a better perspective on a company’s long-run value, but it also provides me with the emotional stability to ride out peaks and troughs.
Use the market, don’t let it use you
Cynthia also wanted to know if I’d use stop-loss orders to protect myself from big drops.
No, I won’t. I have no interest in letting the market dictate when I sell.
One bad quarter or a crazy rumour can send a tech stock tumbling even it if it has no bearing on the long-term success or failure of the business. If I had set a 10-per-cent stop-loss order on my shares, which many pros advise, I would have sold Amazon just before it went on to hit record highs.
Some people say that timing the market is an exercise in futility. I think that’s too kind. Futility means “the quality of having no useful result.” Market timing actually leads to worse results and a lot more stress.
The opposite of a stop-loss order is setting a limit and selling a stock after it reaches a pre-determined gain. I never do this, and I’m not about to start. Since I believe that Wall Street tends to underestimate long-term potential, I assume I might also make that same mistake. After all, I’m no genius.
Underestimating potential is a common mistake. Netflix has moved from $58 (U.S.) to over $300 in the last year. Redknee Solutions Inc. has climbed from $1.18 to well over $4 today.
In both cases, I’m glad I didn’t let some trading algorithm decide when I should have sold. I prefer to let my winners run.
In my personal portfolio, I discussed having bought Tesla Motors Inc. when it was a mid-$50 stock. People screamed at me to sell when the stock broke $100. I’m glad I didn’t. It now trades above $160, and I believe it still isn’t being priced for perfection.
I try to base my buy and sell decisons on a cold-blooded appraisal of a company’s potential. And that leads to the most important investing lesson of all: Keep your emotions out of your portfolio. All they are likely to do is screw things up.