How do you feel about your investments?
On one level, that’s a foolish question. Investments aren’t supposed to be objects of affection. It’s one of the most basic errors to fall in love with a stock. You should never love something that doesn’t love you back. It keeps you from selling when you should; it makes you focus on just one small part of a much larger financial picture—like obsessing on the Mona Lisa’s hands.
But on another level, it’s a very important question. After all, how we manage our assets makes a huge difference to our financial future. And one key to managing our investments is managing our emotions. We’re emotional creatures. If it’s a mistake to be emotionally attached to our financial assets, it’s an equal and opposite error to deny our emotional makeup.
Source: Jeremy P. Gray Photography All rights reserved
It’s a paradox that the best investors care passionately about their craft. They’re fascinated by balance sheets, credit metrics, and quantitative screens. The covariance of different industries and financial structures is an endless source of fascination. At the same time, they can be cold and calculating when it comes to individual assets. When a stock has served its purpose, it’s time to get rid of it—no regrets, no tears. A particular company may be a great investment, but if it represents more than 10% of your portfolio, it’s an imprudently large bet. It’s time to trim it back. As any gambler knows, if you let your stake ride long enough, eventually the house collects it.
Your portfolio should be structured so that you can sleep at night. As Peter Lynch once said, everyone has the brains to make money in stocks. Not everyone has the stomach.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!