`Mind tricks' you can use to fine tune your port­fo­lios

Peter Hod­son shares five strate­gies that in­clude play­ing the `buy­out' game.

Calgary Herald - - FINANCIAL POST - Fi­nan­cial Post Peter Hod­son, CFA, is founder and head of re­search at 5i Re­search Inc., an in­de­pen­dent in­vest­ment re­search net­work help­ing do-it-your­self in­vestors reach their in­vest­ment goals.

A very large part of in­vest­ing is psy­cho­log­i­cal: fight­ing fear, fight­ing greed, do­ing noth­ing when ev­ery­one else is trans­act­ing, ac­cept­ing your short­com­ings and ad­mit­ting mis­takes, it all comes with the ter­ri­tory of the mar­kets.

Over the years, we've de­vel­oped some psy­cho­log­i­cal “mind tricks” to help in­vestors when they are look­ing at their port­fo­lios. They work for us, and are largely com­mon-sense sug­ges­tions, but when talk­ing to in­vestors we have re­al­ized many have not heard of these, so it is time to share them with the world.

Try these five strate­gies on your own port­fo­lio.


Play the ` you have to sell two stocks' game

We had to do this re­cently for real to raise funds for a pur­chase. We needed to sell at least two stocks from our port­fo­lio. We were very happy that it was an ex­tremely hard de­ci­sion. We liked ev­ery­thing we owned. And that's the way it should be. Take a look at your own port­fo­lio, and tell your­self two stocks need to go by the end of the week. Pick those that have dis­ap­pointed you, or don't meet your in­vest­ment goals any­more. You don't have to sell any­thing, but if you find this ex­er­cise easy then per­haps you should sell a few things, and own stocks that you would hate to part with, in­stead.


Play the `buy­out' game

Take a look at all of your cur­rent stock hold­ings. Then, one by one, ask your­self how you would feel if each com­pany was sud­denly taken over, at a pretty nice 30-per-cent premium. Now, most in­vestors would say they would be happy with a takeover. But we want you to be not happy at all.

You want to own stocks with more than 30-per-cent up­side po­ten­tial. You want growth stocks, such as Xe­bec Ad­sorp­tion (XBC on Ven­ture) that are up 207 per cent in the past year. A 30-per-cent premium? Ha! That's noth­ing com­pared to a win­ning long-term growth stock. If you find your­self think­ing 30 per cent is “fine” then maybe it is time to start look­ing for some stocks with greater po­ten­tial.


Ask your­self: Would you buy more in a fire sale?

This is es­sen­tially the op­po­site of the above. Look at your port­fo­lio, then ask your­self if you would buy more of the same stocks if each one sud­denly fell 30 per cent. The an­swer should be “of course.” If you find your­self own­ing some stocks where you wouldn't want more at a bet­ter price, then maybe you are not as com­mit­ted to that stock as you thought? Now, we don't usu­ally like av­er­ag­ing down, and if a stock drops sud­denly one cer­tainly needs to ex­am­ine the rea­son be­hind any drop. But psy­cho­log­i­cally speak­ing, you should like your stocks so much that you would be happy to own more of them. If not, maybe find some other stocks that you like “bet­ter.”


Are you just hid­ing from the tax­man?

We don't like pay­ing taxes any more than you do. How­ever, mak­ing taxes the prime driver of an in­vest­ment de­ci­sion is never the right move. Say you have a stock up 500 per cent or more, such as Aura Min­er­als (ORA on TSX, up 654 per cent this year). First, con­grat­u­la­tions. But sec­ond, look at the weight­ing of the stock in your port­fo­lio. If you bought, say, an ini­tial three-per-cent po­si­tion, you now have a gi­ant po­si­tion in one stock rel­a­tive to the rest of your hold­ings. Don't make a port­fo­lio bet on a sin­gle com­pany. Don't hold a stock just be­cause you don't want to pay taxes. It is fine to hold for other rea­sons, at a rea­son­able weight­ing, but if taxes are the only rea­son then it is time to bite the bul­let and sell some to re­duce risk.


Are you hold­ing that one stock be­cause of “hope”?

Let's face it: We've all been there. Hold­ing onto a los­ing com­pany on the slim chance it will re­cover. In Canada, our data screen shows 142 stocks that are down 60 per cent or more, this year alone. If no other in­vestor likes these com­pa­nies (as is ob­vi­ous by their share price de­cline) then what is it ex­actly that you like about them? Why are you go­ing to be right, when nearly ev­ery­one else doesn't want the same stocks? Sure, stocks are volatile, and losses are part of the game. But hope is not a strat­egy. Trim the weeds in your port­fo­lio and sell any losers where hope is your only chance of suc­cess.


Peter Hod­son says if you find your­self own­ing some stocks where you wouldn't want more at a bet­ter price, then maybe you are not as com­mit­ted to that stock as you thought and maybe find some other stocks that you like “bet­ter.”

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