Year-End Portfolio Review Helps Set Goals for Next Year

By Michael Cintolo, Vice President of Investments and Chief Analyst, Cabot Market Letter and Cabot Top Ten Trader

Every year end, I take a hard look at my investing strengths and weaknesses, examining stock charts of previous buys and sells, comparing them to market action, and so on.  In particular, I focus on what I did worst during the year (yes, even people like us who do this full-time still make mind-boggling mistakes every year, so you’re not alone), figuring that if I can come up with some common mistakes and eliminate them, I can really boost my performance. Hopefully my list will open your eyes to some of your own investing strengths and weaknesses (we all have them!) … and thus help you make more money next year.

So here I go:

1. My loss limits are usually too tight, especially early in new market uptrends.

I have always believed that cutting losses short is, by far, the #1 rule when investing in fast-moving growth stocks. So much so that my stops are often less than 10%, even 5%, as I try to buy a leader near a logical support level.

Problem is, as I wait for a stock to enter my so-called buy range, it refuses to pull back and heads higher without me … especially during the initial “thrust” of a new bull move. The result isn’t all bad (lost opportunity is not lost money, after all), but I have to believe loosening my loss limit in the first two or three weeks following a new buy signal will help me get on board more big winners.

2. My results are better, and my “equity curve” is smoother, when I do some offensive selling.

I always learned that, along with cutting losses short, letting winners run was a mantra worth worshiping. And, for the most part, I still agree with that.  However, the fact remains that, even if you’re a great stock picker, maybe 6 or 7 out of ten stock picks are going to be winners. And of those 6 or 7, possibly one is going to be a big winner, doubling in price.

Thus, in my case, it’s helped when I sell pieces of a stock on the way up; instead of waiting for a 15% drop off a stock’s peak to sell, I take some off the table (maybe selling 1/5 or 1/4 of what I own) after a few good up days, especially if I’m up 20% or more on my purchase. I still hold on to most of my shares, of course, so I can benefit if the stock keeps motoring higher. But it helps to know that I’ve booked some profit, and lessened my exposure, in a stock that’s already run meaningfully higher.

3. My success rate rises when I remain patient after a new buy signal, instead of jumping in full-force right away.

When I began looking back at our biggest winners in recent years, I was surprised to learn that we bought these stocks about four to eight weeks after a market bottom. And because our market timing buy signals come an average of two to three weeks after a bottom, that meant our biggest winners were not purchased right as our indicators flashed green, but instead, a few weeks later.

What does it mean? Simply that, if you time the market like we do (yes, it can be done), it’s not all about getting back in earlier than the next guy. Many investors rush in, wanting to buy at the bottom, and the result is that they own a bunch of OK stocks—but not the true leaders, which are more easily identified a few weeks later. Thus, while it’s hard to do, I’m going to try to be better at wading (not diving) into the market’s waters after future buy signals.

4. I do better when I say to myself, “It’s hard to make money in the market; I’m just trying to scratch out some profits.”

Staying humble in the face of rising profits, or optimistic in the face of mounting losses, is a difficult task—for me as much as anyone. But I’ve noticed that the investors who always shoot for the moon—when their portfolio is up 10% halfway through the month, they start saying “Now I can really start to earn some profits!,” and that usually comes right near a market top—often have sub-par long-term results. Those who are humble usually have less spectacular peaks and valleys, but make great money over time.

Thus, I’m going to try to remind myself to be patient, to be humble, and to remember that this is a tough business; even the best are incorrect 30% to 50% of the time. Doing so will keep me in the right frame of mind for making sound decisions.

5. I do better when I have a consistent plan heading into earnings season.

In recent years, earnings seasons have been totally insane—many of our stocks will move 10% or more up or down based on their reports. In our Cabot Market Letter, we generally just hold all our shares through the report, and take what comes. (We figure the odds are in our favor, long-term, by owning strong leaders during uptrending markets.) Personally, I tend to lighten up a bit ahead of a stock’s earnings report, especially if I don’t have much of a profit in my position.

My biggest conviction is that, whatever I decide to do, I should do it consistently—if I’m going to sell a piece of XYZ stock ahead of its earnings report, I’m doing the same thing for all my stocks. In other words, having a game plan is key, as earnings seasons are quickly becoming a time where a full years’ profits can be made or lost.

Those are five goals for me next year. I think every investor can benefit from such a post-mortem review, so if you have some down time during the holiday season, go back and look at some of your trades and see if you can find some common themes to improve upon.

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