Pennsylvania Investment Observer

Wrong, Again!

by Daniel J. Nestlerode

Being an adult in the twenty-first century is to be afflicted with the notion that once you are over thirty you never (well very rarely) ever make mistakes. The corollary to this rule is to avoid any new activity where you might find yourself not looking good. So we settle into our patterned behaviors and become routine.

These adult behaviors aren't very useful when it comes to running money, which is jargon for managing portfolios. Buying individual stocks for clients always leads to some purchases turning out differently than you expected. If you have trouble selling your losers, or even admitting that you have losers, then portfolio management is not the kind of thing you should pursue. Portfolio management is about making lots of purchases, after careful consideration and study, and then sorting out the ones that perform poorly. You can call these mistakes, in ordinary terms. However, I have never found a system that lets me buy only the stocks that rise in price. I have to buy a number of stocks (at least 15 for most portfolios) and in that group there will be at least two or three losers. The reality of portfolio management is that no one can tell you which stocks to avoid. Therefore, you are stuck with not looking good. It is just a fact of life. I personally have a long list of losers I would have liked to avoid. I also have had some great winners.

Good portfolio management is the continuous culling of your mistakes from your portfolio so that the winners move the entire portfolio towards profits. The bottom line in portfolio management is not how any individual part of the portfolio performed, but by how the total portfolio performed in relation to how the overall stock market performed and in relation to the alternative investments readily available to most investors, i.e., certificates of deposit. To know these numbers, you must have software that allows you to continuously measure the performance of your portfolio.

We have a fairly expensive portfolio management system in our office that collects all the data on all our portfolios daily. We can then measure the performance on each account, and then drill down in the detail to discover which investments are helping the performance of the account and which are our "mistakes". By identifying our mistakes early in the process, we can eliminate the problems before they do permanent damage to the performance of the overall portfolio. This only works, of course, if we pay continuous attention to all the holdings of all our clients.

So what is portfolio management? Researching, studying deciding, buying, keeping track, identifying mistakes, selling losers or taking profits on winners, measuring continuously, and paying attention. Ultimately, successful portfolio management is that endeavor that provides a net return for the client that exceeds the readily available alternatives, and meets the clients' objectives for investing.

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