RD's Picks

With the SLO nearing the half-way point, it seemed like a good time to see how I'm doing against my objectives for this contest. My primary goals for the SLO were to practice portfolio management, learn a few things and help evaluate whether I want to manage my own stock portfolio or continue investing through mutual funds. The practice has been good and I have been learning a few things. Not much help so far in the stock portfolio vs. mutual fund decision. A few things that stand out so far:

1. The first few weeks showed us cheap stocks can get cheaper. Even when you're sure they can't go any lower, they can.

2. Patience. I was in too much of hurry to meet the compliance requirements. Worse, I saw the dips early in the contest and piled in too quickly getting nearly fully invested the first week - then watched point 1 play out.

3. Watch commissions. I wanted some gold exposure in the portfolio and picked Northgate Minerals because it offers exposure to gold and a potential kick if their new mine gets approved. However, it's a $3 stock, so a five-cent per share commission takes nearly two-percent off the top. Had I considered commissions, I would have selected a gold stock or ETF with a higher share price to reduce the commission percentage. And be careful playing with kickers, they kick both ways - the new mine approval ran into snags and NXG has been a big drag on my performance.

4. I've had pretty good success enhancing returns by trading around a core position. I've been far more aggressive with this in the SLO than real life, but still have only used small pieces of the core position. This wouldn't be very effective in a taxable account since you would end up with a lot of short term gains (losses) and a complicated cost basis for your shares. Obviously, works best with free or low-cost commissions. I plan on getting more familiar with technical analysis methods to help set the trading buy and sell points, but don't see myself getting very aggressive with this strategy in my real portfolio.

5. Know why you bought a stock. In rough markets, you can go back over your notes and see if your reasons for owning the company are still intact, research to see if you missed something, and make a rational decision on whether to bail out or ride it out. I think my best portfolio management decision so far has been selling out of ARII after a bad earnings report. I locked in a loss, but avoided an even bigger loss. Since one of the key reasons for putting ARII in the portfolio was an expectation of strong earnings growth, the decision to sell was easy when earnings didn't materialize.

6. Blogging has been more helpful than I thought it would be. Writing about what I'm doing helps me organize my thoughts and consider the risks and rewards of the moves I make. The blog really makes me think about what I'm doing since millions and millions of people (ok, I exaggerate -but it sounds better than no one) will be ready to laugh at my mistakes. It also serves as a journal to record the reasons for making the investment - useful for point 5.

7. One of my objectives in this contest is to determine whether or not I can beat the mutual funds in my account and the overall market. The results so far are mixed. Marketocracy shows me ahead of the S&P 500; my spreadsheet shows me a little behind. I'm also tracking my performance against three stock mutual funds I hold and am beating two of the three so far (beating Allianz NFJ Dividend Value and Hennessy Cornerstone Growth, losing to Toqueville). Backing out Marketocracy's management fees would improve my performance, but not enough to move me ahead of the S&P or Toqueville.

8. This is more time consuming than I had anticipated. A key factor in deciding whether to run my own stock portfolio or continue to invest through mutual funds will be whether or not I'm willing to invest the time. Based on my results so far, I would have to conclude I'm better off buying an index fund, broad market ETF or mutual fund and free up the time. But, I am enjoying this and the game isn't over yet. The smartest move might be to just copy Vad's portfolio.

9. Using Yahoo's historical price quotes, I calculate the S&P 500 is up 7.05% since the contest started. If it were a player, it would be in 290th place out of 558. Over half the field is smoking the market. Most of you are pretty good at this.

I'd be interested to hear what you think your best (or worst) portfolio management decision in the SLO has been so far?

Comments: View Comments |  Sunday October 14, 2007