3 Mistakes I'm Making With My Portfolio
For any period of less than five years, says Oakmark's Bill Nygren, "you are evaluating serendipity rather than skill."'
When I applied for a job with the Los Angeles Times in 1989, the editors told me they wanted someone to write about investing. I replied that they were interviewing the wrong girl. Of course, I did want the job. The Times was a great newspaper, and it happened to be in my hometown. But investing? I confessed I knew little about it. But the business editor knew my work ethic. "You'll learn," he said, and hired me.
Over the next 20 years, I read voraciously and regularly spoke with some of the nation's best stock pickers. I discovered that discipline, tireless research and luck played big roles in determining investing success. Yet what appeared to differentiate great investors from merely good ones was how they handled periods of adversity. The best recognized their shortcomings without sacrificing their strategy. The worst unloaded their stocks and abandoned their approach.
That's one of the reasons Bill Nygren, longtime manager of the Oakmark and Oakmark Select funds, became one of my investing heroes. A value investor for some 30 years, his 2007 results were so poor that this magazine removed Select from its Kiplinger 25. But Nygren and his co-managers maintained their discipline, and the performance of both funds improved dramatically.
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Too soon to judge. Although my "Practical Investing" portfolio got off to a fast start, it now lags the market. (It was up 13% through January 4, two percentage points behind my benchmark.) Disappointed with my results, I called Nygren for advice. He said it was too soon to judge my performance. For any period of less than five years, "you are evaluating serendipity rather than skill," he said.
What's been weighing on my portfolio's returns lately has been a sharp drop in two technology holdings, Apple (symbol AAPL) and Intel (INTC). Although Apple is still up substantially since I bought it, my gain has been cut in half. Intel, which soared nearly 20% in the first months I owned it, is now down 4%. The market seems to be suggesting that Apple's growth is on the wane and that the personal-computer business is toast, a big negative for Intel.
He owns them, too. Nygren, who also owns Apple and Intel, thinks that both are bargains and that the market is wrong. He doesn't know when the stocks will emerge from their funk, but he's convinced that they're worth owning for the long term.
That aside, I came away from the hour I spent on the phone with Nygren realizing that I've made three mistakes. First, he believes my rule demanding that I hold a stock for at least one year is ill-conceived. Nygren sells for one of two reasons: A stock has done so well that it's fully valued, or a firm's financial performance or strategy has failed to live up to his expectations and is unlikely to meet them in the foreseeable future. A trigger could occur in a week or in a decade.
Second, a good value investor needs gunpowder — cash you can put to use when prices of superior companies go on sale. Unfortunately, my portfolio is fully invested in stocks. And third, although my initial idea of buying shares in $10,000 increments was meant to make tracking performance simpler, Nygren says it's smarter to buy more of the stocks you like the most.
As a result of our conversation, I will review every stock, regardless of how long I've held it, to decide whether it stays or goes. And I'll be looking for ways to build cash for snapping up bargains, which I may or may not purchase in $10,000 baskets.
Nygren's final bit of advice is something I've heard others say before, but it bears repeating. People need to approach stocks as rationally as they do shopping. Says Nygren: "If you see a $50 shirt on sale for $25, you buy it. Investors go the other way. If something sells for $100 and it goes to $125, they buy it. If it drops to $75, they lose interest."
Kathy Kristof is a contributing editor to Kiplinger's Personal Finance and author of the book Investing 101. You can see her portfolio at kiplinger.com/links/practicalportfolio.
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