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Your portfolio may be better off without you, for a little while at least.
Whenever I go on holiday, or spend a few days engaged in activities other than investing, I'm always amazed at how well my portfolio does without me. It's still there when I get back and nothing disastrous has happened. Sometimes, the prices of the shares I own have even gone up!
Let it grow
Just as Eric Clapton once sung, "Let it grow, let it grow, let it blossom, let it grow ...". Our investments need time to do the thing that you bought them to do in the first place, and they do that better if they are not constantly watched or meddled with.
But don't take my word for it, this theme is a favourite of super-investor Warren Buffett. Here are just a few of his words on the subject:
"The stock market is designed to transfer money from the active to the patient."
"Wall Street makes its money on activity, investors make theirs on inactivity."
"We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely"
Planting the seed
Admittedly, you have to do some legwork in the first place, as investments don't pick themselves.
Perhaps you've identified a value investment selling cheap, or a growth company selling at a reasonable price. Or maybe you are hunting for high dividend yield.
Whatever your investment choice, it usually takes a while for your investment to mature. The undervaluation you've spotted has to be recognised by the market, or it may take a few years for profit growth to materialise.
It can be a frustrating process waiting for all this to happen. The share price can sit stubbornly near to the price you paid for months, or even years or worse still; go down.
You check and re-check your analysis and assumptions and nothing seems to be wrong. Why can't the rest of the world see what you can see? Why won't that share price go up?
The bamboo tree
I sometimes think of investing as like a bamboo tree.
When the seeds are planted, nothing happens. Indeed, nothing seems to happen for years except that tiny shoots come out of the seeds. But that is not the whole story, for just like investments where the underlying company is building value, the bamboo seeds are growing huge deep root systems.
Finally, after several years, the seeds start to grow. Supported by their huge, deep, and robust root systems, the bamboo rapidly grows to a great height. And something similar can happen with investments.
Avoid temptation
Of course, the danger is that we can become frustrated with such slow-moving investments and sell them prematurely, thus missing the investment equivalent of the bamboo's final growth spurt. Perhaps we should be mindful of the often-quoted Chinese proverb:
"The temptation to quit will be the greatest just before you are about to succeed."
In my view, it is important to monitor investments so that you can sell them if the 'story' changes, but the temptation to sell too early can be magnified if we watch our portfolios too closely -- so give your portfolio a break.
BY Kevin Godbold
Published in Investing Strategy on 27 July 2010
http://www.fool.co.uk/news/investing/investing-strategy/2010/07/27/the-power-of-inactive-investing.aspx
Whenever I go on holiday, or spend a few days engaged in activities other than investing, I'm always amazed at how well my portfolio does without me. It's still there when I get back and nothing disastrous has happened. Sometimes, the prices of the shares I own have even gone up!
Let it grow
Just as Eric Clapton once sung, "Let it grow, let it grow, let it blossom, let it grow ...". Our investments need time to do the thing that you bought them to do in the first place, and they do that better if they are not constantly watched or meddled with.
But don't take my word for it, this theme is a favourite of super-investor Warren Buffett. Here are just a few of his words on the subject:
"The stock market is designed to transfer money from the active to the patient."
"Wall Street makes its money on activity, investors make theirs on inactivity."
"We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely"
Planting the seed
Admittedly, you have to do some legwork in the first place, as investments don't pick themselves.
Perhaps you've identified a value investment selling cheap, or a growth company selling at a reasonable price. Or maybe you are hunting for high dividend yield.
Whatever your investment choice, it usually takes a while for your investment to mature. The undervaluation you've spotted has to be recognised by the market, or it may take a few years for profit growth to materialise.
It can be a frustrating process waiting for all this to happen. The share price can sit stubbornly near to the price you paid for months, or even years or worse still; go down.
You check and re-check your analysis and assumptions and nothing seems to be wrong. Why can't the rest of the world see what you can see? Why won't that share price go up?
The bamboo tree
I sometimes think of investing as like a bamboo tree.
When the seeds are planted, nothing happens. Indeed, nothing seems to happen for years except that tiny shoots come out of the seeds. But that is not the whole story, for just like investments where the underlying company is building value, the bamboo seeds are growing huge deep root systems.
Finally, after several years, the seeds start to grow. Supported by their huge, deep, and robust root systems, the bamboo rapidly grows to a great height. And something similar can happen with investments.
Avoid temptation
Of course, the danger is that we can become frustrated with such slow-moving investments and sell them prematurely, thus missing the investment equivalent of the bamboo's final growth spurt. Perhaps we should be mindful of the often-quoted Chinese proverb:
"The temptation to quit will be the greatest just before you are about to succeed."
In my view, it is important to monitor investments so that you can sell them if the 'story' changes, but the temptation to sell too early can be magnified if we watch our portfolios too closely -- so give your portfolio a break.
BY Kevin Godbold
Published in Investing Strategy on 27 July 2010
http://www.fool.co.uk/news/investing/investing-strategy/2010/07/27/the-power-of-inactive-investing.aspx
