New Year's (Financial) Resolutions: Put That Cash to Work

Over the 365 days of 2010, the S&P 500 gained 12.8% in value. Meanwhile, my personal stock portfolio was up 26.6%. But I'm not bragging. I'm confessing.

You see, the sad, embarrassing fact is that while I thumped the market in 2010, I did so with 1.5 hands tied behind my back. Worried I was "missing something" -- that this was too good to be true -- I kept nearly 75% of my investable cash sitting on the sidelines, earning zilch at current interest rates. This year, I resolve to do better. This year, I aim to trust my instincts, and put more money to work.

Inertia is your enemy
Before doing so, it bears mentioning how my present dilemma came about, because it's a situation I think many investors will recognize. You see, I didn't end up three-quarters out-of-the-market by design. Fact is, the dollar value of my portfolio has held pretty constant for the past five years. It's just that, while I've become comfortable with investing $1,000 in a stock, the idea of putting larger sums at risk terrifies me. Why?

Consider: When you graduate from college, you earn $X. You think $Y is "a lot of money." Maybe you develop the courage to invest $Y in the market; maybe not. But even if you do, psychologically, $Y remains "a lot of money" to you.

So here's the problem in a nutshell: Over time, as our experience in our profession grows, so too does our income. Ten years into our careers, that $X we first earned out of college no longer seems such a fat paycheck.

In contrast, $Y is still "a lot of money." It's money you earned by the sweat of your brow, and every day Mr. Market threatens to swipe it away. Increasing the size of the $Y in your brokerage account takes a conscious determination to put more money to work ... and at risk. And sad to say, it's an effort I've failed to muster.

It's not that I've been "burned" too often. Oh, I've made my fair share of mistakes: an ill-timed entry into Barnes & Noble, just before it began burning cash to develop its Nook e-reader; a sizable investment in Activision, a stock that had seemingly everything going for it, yet has gone precisely nowhere. Fortunately, these setbacks came few and far between, and I've learned that I can indeed put $1,000 to work in a stock, and win more often than I lose.

Problem is, today, even the "winnings" I reap from such investments look laughably small relative to my current net worth. It's time to change that. It's time to make bigger bets.

Trust the Force
And you know what? My misgivings and cowardly nature notwithstanding, I really think this is going to work out well.

You see, in my first few years of investing, I fell prey to misgivings I suspect a lot of you share. Sure, I made some money in the market, but I was "lucky." I chanced upon a bull market, or just happened to transfer a few bucks right before the big post-housing bust rebound. But at some point, the "luck," "chances," and "just happenings" begin to defy probability. At some point, the only logical conclusion is that there's an actual cause and effect at work. Things are bound to turn out well when you invest in companies with competent management, copious cash flows, and impregnable balance sheets -- companies like RF Micro (Nasdaq: RFMD  ) , EMC (NYSE: EMC  ) , and Cisco (Nasdaq: CSCO  ) , all of which I've recommended here on Fool.com.

Now this is going to sound like product-pushing, but honestly, what got me, personally, over my psychological "hump" was Motley Fool CAPS. For more than four years, I've followed a pretty strict regimen of recommending only cheap, high-quality stocks on CAPS -- stocks that represent growing, cash-profitable companies, selling for low prices. I didn't buy all of these stocks in real life (sadly), but most of them are stocks that I would ordinarily feel comfortable owning.

How have I done? Here's a sampler, based on my recent scorecard:

Company

Picked at

My Gain

My Gain vs. S&P 500

EMC $10.15 131% 81%
RF Micro Devices $4.09 89% 73%
iRobot $16.12 60% 51%
Tesla* $35.41 25% 33%
Morningstar $27.47 96% 27%
Google $500.98 21% 12%
U.S. Steel* $60.22 <1% 12%
Chesapeake Energy $29.81 (12%) (6%)
Activision $11.93 3% (6%)
General Electric (NYSE: GE  ) $28.65 (35%) (28%)

*Picked to underperform.

As you can see, my record is far from perfect. GE, for example, has begun a long trek back to its roots as an industrial titan, but it still has a ways to go. Clearly, that's one I picked too soon -- and too publicly -- but it's far from my only gaffe. In fact, nearly three out of every 10 stocks I pick to go up (or down) faster than the S&P 500 in fact do the exact opposite.

But that's OK. My record is good enough that overall, I'm outperforming 99% of the 170,000-plus investors currently tracked on CAPS (many of them professional investment bankers with batteries of Bloomberg terminals and battalions of worker drones at their disposal). On average, my recommendations on CAPS have outperformed the S&P 500 by nearly 15 percentage points apiece.

Time for life to imitate art
As I said at the beginning, I'm not bragging. Remember that many of the names listed above are stocks I did not buy, because I was too scared. But faced with irrefutable evidence that buying cheap stocks "works," this is the year I aim to change that -- shaky nerves or no.

My advice to you: If you haven't yet chosen a New Year's resolution for yourself, here's an easy one: Set up a Motley Fool CAPS account for yourself (it's free).

Overcoming insecurities isn't easy, but I'm convinced that with the right tool, you can achieve this goal, too. CAPS is the tool. Now is the time.

Fool contributor Rich Smith owns shares of Google, Activision, and iRobot. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 699 out of more than 170,000 members. The Motley Fool has a disclosure policy.

Chesapeake Energy and Google are Motley Fool Inside Value recommendations. Google and iRobot are Motley Fool Rule Breakers choices. Activision Blizzard and Morningstar are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. The Fool owns shares of Activision Blizzard, Google, and Morningstar.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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  • Report this Comment On January 07, 2011, at 3:56 PM, jsmunson wrote:

    Good article. I not sure where I acquired my point of view but it is a follows: 1) I can not time the market, I don't know if its going up or down and by the way I do not know anyone else who can predict it reliably either. 2) money not invested is not working for you, and 3) on any day there is a stock that is fairly valued that you can purchase and make a return.

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