It's time for my first year-end review of how my portfolios are doing. I hope this introspective proves interesting for readers, because, as I've garnered from other financial blogs, it will certainly be useful for me to consolidate my experiences into one critical place.
So I'll chomp my surrogate cigar, a slab of delicious Robertson Farm's beef jerky straight from Oklahoma, and get a rollin'! Know-nothing investor a-go-go! …
PREFACE
This year was my first complete year of stock market trading and investing. To say I learned a lot would be like saying the United States is about apple pie and baseball. To be honest, I never expected I would get into investing, being someone who detests small details, and finance is all about small details. But as a person with an extreme macroscopic world view, I couldn't help but feel economics was but the shadow of human behaviour, and therefore equally predictable.
I began investing not because I wanted to make money, but because I wanted to put my money where my mouth was when I knew I was right. Stocks? As far as I was concerned, they were just tables to gamble at. What I discovered, however, is that like gambling, the less you know, the more of a gamble it is. Today, stocks are not roulette to me, they are games of no-limit Texas Hold'em.
WHAT I INVESTED IN
Stocks
ABX, PFE, MOT, TPP, PHO, FPL, BWNG, EBAY, TUES, STU, SLM, ATVI, SLJB, NTDOY, EWJ
Mutual Funds
PRNEX, PRJPX, PRFDX, TREMX, TRRDX
WHAT WENT RIGHT
25.1% and 11.36%. That's what went right. The first is my stock portfolio, representing about 40% of my total invested amount, and the second is my mutual funds, representing the remainder that acts as a long-term retirement buffer filled with internationals and IRAs.
I am extremely proud of the stock portfolio returns, though that is a feeling I will grind out very soon. The market is unforgiving to hubris, and you're only as good as your next trade. The biggest correct move I made this year was to move into defensive large cap stocks as market volatility shot up before the crash in summer. As the FED continued to raise interest rates, the market grew apprehensive, and I stood in high-yield underpriced mid-large caps. I include buying commodities into this category, namely gold (ABX) and oil (PRNEX) at the beginning of the year.
The other major moves I made were in buying into eBay (EBAY), at the announcement that Yahoo's ad revenues would fall, which I believed unfairly pulled eBay down with the internet sector, since eBay is IMO a service, not a tech start-up. I also did well in a relatively untraded student loans company (STU) at a time when education costs continue to outstrip inflation. Before the summer crash, I kept grabbing a plummeting Motorola (MOT) because I knew its overseas market was underestimated. I was rewarded handsomely for that as well come Motorola's quarterly earnings.
Most importantly, most of these gains are locked. With tight stop losses and bursts of close monitoring, I realized most gains at the first sign of weakness after +10%. I allocated about a third of the portfolio to each trade. I made a total of 34 trades in the whole year, averaging 2.8 trades per month. My goal is to reduce my trades by 25% this coming year.
WHAT WENT WRONG
I made plenty of newbie mistakes. I began investment subscribing whole-heartedly to the Warren Buffet fundamentals school of thought, and the quickly realized that I didn't have the acumen to understand financial reports. After subscribing to Morningstar.com and the KirkReport, I decided what came most naturally to me was approaching analysis in this order: macroeconomics, fundamentals, technicals, market sentiment, sector rotation, news.
Before I made this strategy part of my game, I ignored technicals. It was my weak spot. I jumped into several positions prematurely solely on the firm belief that the stock would soar twenty years from now. Well some did improve, and I'm sure the rest will soar, but I wasn't able to discipline myself for that kind of wait. So I began studying the technicals. By using technicals to decide on good entry/exit points for companies with great fundamentals, I had a profitable failsafe. On both PFE and MOT, I could have avoided a 8-10% drop had I been less afraid of taking a loss.
After they rallied, my memory of their lows made me place stop losses at just the lowest low of the prior 5 days. Needless to say, slight bumps shook me out of the longer rally, and I lost half of my profit potential there. It was humbling to find out I had been shaken out days before I realized it, and I was still tracking them a week after they were sold. Shame on me!
I tended to lock my earnings to quickly, and underestimated the ability of some stocks to continue rallying. I don't regret it, as Buffet said the best way to make money is to not lose money, but I will certainly be more openminded to the actual stock sentiment instead of trying to maintain my yield points. To put it in plain English, I was afraid to take losses after I had a profit.
WHAT I LEARNED
In the end, I'm left optimistic and much more confident. I'm left with a grim purpose to refine my strategy, and stick to it, to avoid second-guessing myself and my decisions. I learned the need to be flexible, to not fight a direction that on paper looks wrong. In the stock market, being right isn't any good if no one agrees. It is more important to be right about how people will perceive things.
I think I've done very well regardless. I am planning on exiting some of my mutual funds, leaving only Xstine's and my Roth IRAs so that I can stay nimble and manage things myself. I missed an exit on energy and wiped out alot of gains, something I won't let happen in the future. There isn't as huge a gap as I previously thought between what fund managers do and what I can do, 'cept they charge a pretty penny for it.
Most of all, what I learned is that success doesn't take talent, or intelligence, or luck. Mostly, it takes hard work and the ability to monitor yourself objectively, clinically, and fairly, and to be able to draw a line at a certain point to say you are making a decision that you will stick with. How close that line is drawn to match reality is how successful you'll be in investing and trading.