This article is part of our Rising Star Portfolios series.
When in danger
Or in doubt,
Run in circles,
Scream and shout.
There's a coffee mug sitting on my desk that shows the Warner Bros. cartoon character Wile E. Coyote with different expressions, ranging from coolly confident to extremely surprised (his eyes are, literally, bugging out) to downright angry.
For the past few weeks, the picture that's best described how I'm feeling with what's been happening in the market and to my Messed-Up Expectations (MUE) portfolio is the one where he's cowering under a tiny umbrella, waiting for the world to fall on him.
When in danger or in doubt
Since the end of April, the net asset value of the MUE portfolio is down by 6.7% and the internal rate of return since inception has dropped from 7.83% to 0.65%, including dividends. For comparison, the SPY has fallen by 6.6% over that same time period.
Looking at those numbers, it actually doesn't appear to be as bad as I thought; the portfolio seems to be tracking the S&P 500. However, I suppose I can be forgiven for thinking in terms of doom and gloom:
- The three purchases of Transocean (NYSE: RIG ) are down 6.5%, 15.5%, and 13.8% with shares trading around $60, the lowest they've been in nine months.
- Automaker Ford's (NYSE: F ) shares are down to around $13, while I bought them in the mid-$14 range.
- Manufacturer Textron (NYSE: TXT ) is showing declines of about 10.3% and 17.5% from the two times I've purchased it.
Running in circles doesn't help
Considering the results for three of the companies I have the most confidence in, you'd think I would be doing some running and screaming in response to the danger those losses represent. Sure, doing that might relieve some tension (and provide some amusement for my fellow analysts at Fool HQ), but it's not very constructive.
Instead, I'm using the time to recheck my investment thesis for each of the positions in the MUE port. In one case, Nam Tai Electronics (NYSE: NTE ) , I trimmed the position back to lower the risk that company presents. I wrote about that and then expanded on that thinking while giving further thoughts on the MUE discussion board about why I think Nam Tai's dividend is at risk.
After reviewing the situations for Textron, Ford, and Transocean, I believe that their investment theses remain intact. Textron, for instance, is still seeing some struggles at its Cessna division -- it recently replaced the division's CEO -- but its defense division had a successful weapons test and Congress seems likely to authorize funding for more V-22 Osprey helicopters.
Transocean is seeing growing demand for ultra-deepwater rigs. And, in the first quarter, Ford paid off an additional $2.5 billion in long-term debt, and its automotive sector now sits at a $4.7 billion net cash position, a significant improvement over the end of 2010.
Handling those emotions
Going through this exercise lets me overcome my lower brain's instinctive reaction to a threat. It doesn't matter that the threat is portfolio losses instead of a saber-toothed tiger; our bodies and brains are still wired as if we're facing the tiger. Slowing down and revisiting the theses and companies lets me think instead of simply react, and it helps me realize that my process is still working while I tweak it where needed.
After I survived the crash of 2008 and came out the other side even better than when it started, I know that this current market correction shouldn't bother me as much as it does. But my emotions don't care -- that was then; this is now. Still, successful investing depends on not running in circles, screaming and shouting. The analysts at Fool HQ are going to have to find their amusement elsewhere.
For more clues on how to deal with your emotions when your investments give them a good kick-start, read Jason Zweig's excellent book, Your Money & Your Brain. In it, he highlights research showing how our emotions affect and harm our investing and provides strategies for dealing with them. I know it's helped me.
After reading his book, come and discuss emotions and investing on my Messed-Up Expectations discussion board -- or follow me on Twitter.
This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).