My phone is an old Nokia (NYSE: NOK) about the size of a small brick.
It doesn't take pictures, tell me the weather or connect to the Internet. That's the way I like it.
In a world that has grown increasingly complex, I feel like a throwback to a different era. I like things to be as simple as possible -- and that includes my investing.
As an engineer at IBM (NYSE: IBM) in my former life, I used to deal with complex problems... and solutions... day in, day out. That's when I started to understand just how damaging too much complexity can be -- no matter where it pops up.
Nowhere is this more obvious than in the aftermath of the nasty recession we seemingly haven't been able to shake for years now.
For example, home mortgages were packaged and repackaged into mortgage-backed securities time and again until even the banks that invested so heavily in them weren't sure what they contained. The result was our government having to bail out the financial firms.
Bernie Madoff even hid behind a curtain of complicated scheming to commit fraud on an unprecedented scale. But no one could really tell what was going on because of its complexity.
Is it any wonder that I like to keep things simple in my day-to-day life, but also in my investment portfolio?
Judging from the investment landscape, many investors equate complexity and secrecy with smart investing decisions. How else can you explain the rise of hedge funds during the past several years?
These funds have very little regulation, usually use complex derivatives and futures contracts, and are generally tight-lipped about their investing decisions. To me, this doesn't sound like it is in the best interest of investors.
In fact, in 2008, 1,471 hedge funds shut down, according to Forbes. This was fully 15% of all the funds in the industry.
So much for outsmarting the market…
My investing style is just a little bit different. Like I said, I keep things simple.
In fact, you could sum it up in one sentence: "Find just one stock each month that will beat the market."
And I'm not just blowing smoke. I actually practice what I preach in my Stock of the Month newsletter. Once a month, I pick one stock to add to my $100,000 real-money portfolio. Once my portfolio reaches 12 picks, that's it, I'm done adding more stocks. If I want to add another stock, then I must first take one out.
I started in April of 2009 -- and by keeping things simple and limiting myself to just 12 holdings, my real-money portfolio averaged a 24.0% return on each one of my closed trades.
No, I'm not clairvoyant. And I don't really think I have a "golden touch." Just like you, I've seen several of my holdings fall in this market.
But over time, the strategy seems to work for several reasons:
1. It lets your winners work and cuts the losers.
We all have at least a couple of stocks in our portfolios that we don't really like. For whatever reason it's tough to let go of some holdings -- even if we're not hot on their prospects right now. But if you limit your portfolio size to just 10 or 12 holdings and use a "pig-at-the-trough" game plan (only so many pigs can eat at one trough; so if you add a new pick to an already full portfolio, you have to get rid of one current holding), you'll solve this problem.
As a result, the dogs that you've always wanted to get rid of will stop wreaking havoc on your portfolio, and your holdings will consist only of those stocks you like the most. As Warren Buffett says, "It's crazy to put money into your 20th choice rather than your first choice."
2. It allows investors to be experts on their holdings.
You've heard the phrase "Jack of all trades, master of none." To me this best describes a lot of investors. Portfolios with dozens -- even hundreds -- of securities run an extreme risk of having more than you can handle.
But keeping a very focused portfolio allows any investor the time to go in-depth into a handful of select companies, making them experts on their operations.
3. You can't beat the market if you are the market.
A funny thing happens as you add more and more picks to your holdings -- your returns can suffer. Experts will always tout the benefits of diversification. And I agree with them... but only if you want to track the market. I'm more interested in beating the market.
The more holdings you own, the closer you are going to come to matching the market's moves. That makes sense -- you can't beat the market if your portfolio is the market.
Don't get me wrong, diversifying is essential for any portfolio. Putting all of your eggs in one basket is never a good idea. It's just that sometimes investors diversify too much, inadvertently hurting their performance.
The Investing Answer: If you want to beat the Street, you need to pick your very best investment ideas and use them to power your portfolio.
- Create a retirement savings goal
- Design an investment plan to reach it.
- Get a professional money manager to continually monitor and rebalance your portfolio
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