THE ESSENCE OF PORTFOLIO MANAGEMENT ::.::.:..

Successful portfolio management is not only about knowing what stock to buy, but also knowing when a stock should be sold and when a stock should be held. However, most investors approach the challenge as a problem that should be solved only by superior stock selection. The image of the successful investor as a champion stock-picker minimizes the ongoing responsibility in upgrading the portfolio. It also overlooks some of the real problems in making predictions in the stock market.

PITFALLS TO AVOID AS A LONG TERM INVESTOR ::.::.:..

Always beware of the following pitfalls which tend to cloud your behaviour and response to market situations.

Making Predictions: One of the major dangers of prediction is that the ego gets involved and the analyst finds it difficult to admit he/she is wrong, even in the presence of considerable evidence to the contrary. Being wrong in our predictions is something that few of us can tolerate very well! This is especially true when we have made public forecasts and have used considerable persuasion to get others to believe in our predictions.

Consensus Opinion: Any slogan or phrase, that is capable of being repeated over and over until almost no one doubts its validity. This consensus opinion leaves no room for consideration of the reality of the market place. And any event contrary to this consensus opinion leads to a shock event. This surprise almost always catches the consensus opinion totally off guard.

Surprising Trend Changes: Trend changes are usually the result of an unexpected change in the workings of the market or the economy. Experience shows that in a very high proportion of cases these trend changes in security prices can be judged to have occurred in advance of the shock or surprise that supposedly produced the trend change. The trend change in advance of the surprise did not fool everyone, it just fooled the majority, it fooled the believers in the consensus.

Long-term Trend Reversals: It is reasonable to believe that the consensus followers will not believe the trend reversal when it occurs. Maybe they are blind to it rather than unwilling to believe that it is real. The first step in successful portfolio management is to develop an open mind to the possibility that a trend reversal might be real, in direct contradiction to the prevailing consensus opinion about that stock.

HOW CAN WE HELP ::.::.:..

Behavioral finance has identified a tendency for investors to accept profits from their winners quickly but they will gamble with the losses from their losers. This is exactly what a successful investor should not do. Peter Lynch characterized it as a gardener who pulled the flowers and watered the weeds.

The Essence of Portfolio Management
Pull the weeds!
Water the flowers!
Believe what you see!

The most important thing is how you SEE! We can help you SEE! from a different, contrary perspective. Contact Optionwala for any help with your portfolio. Or for just a contrary view point to help you decide.

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