Fulfilling a resolution like "never invest in anything that loses value" is as unlikely as sticking to that diet or gym routine just because the calendar changed. But that doesn't mean you shouldn't create a set of practical investing goals to achieve. Below, I'll share my investing resolutions that might help you form your own.
1. Read every investment's proxy statement
The proxy statement is an annual filing that details who runs the company, what experience management has, how much management gets in compensation, how management is incentivized, and how many shares management owns. This information provides a clear picture of whether an investor should trust their money with a company. I've given an example of going through a proxy statement with Micron's (Nasdaq: MU ) filing, concluding that Micron's management is fairly trustworthy with an investor's money.
2. Rebalance my portfolio
Rebalancing a portfolio can seem like a pesky accounting task, and there are plenty of arguments to help confuse you on whether you should or shouldn't rebalance. Vanguard founder Jack Bogle doesn't rebalance his portfolio, and research he did back in 2007 found that through 25-year periods dating back to 1826, rebalancing only won 52% of the time. But Bogle also states that "there's certainly nothing the matter with doing it." Personally, when one stock in my portfolio soars and represents a larger chunk of my net worth than I'm comfortable with, my risk tolerance tells me that it's time to reap some gains. For you, rebalancing will depend on your own risk tolerance, the potential fees, and whether you think your winners will continue to win or losers continue to lose.
3. Create and follow my own investment thesis
Remember The Wall Street Journal's Investment Dartboard, where stocks picked by random dart-throwing competed against analysts' picks? It turns out the stocks chosen by random darts achieved higher returns over the long term. If professional analysts can't beat random darts, how is a personal investor supposed to choose winners?
Well, as Peter Lynch says, "In this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10." If you can throw that dart at a sheet of companies that possess good management, insider ownership, a healthy moat, and good future prospects, you improve your chances of beating the darts thrown at random companies. Based on that, here are three stocks I found that reflect that investment thesis, with gross margins as a proxy for a healthy moat and revenue growth reflecting future prospects:
3-Year Annualized Revenue Growth
|Universal Display (Nasdaq: PANL )||13.5%||93.8%*||73%|
|Cheniere Energy (AMEX: LNG )||8.3%||73.2%||245%|
|Northern Oil and Gas (AMEX: NOG )||7.2%||82.9%||278%|
Sources: Motley Fool CAPS and S&P Capital IQ. *Universal Display gross margin assumes only cost of chemicals sold is included in calculation.
Now with companies chosen, an investment thesis that outlines the reasons for buying -- along with any potential reasons to sell, like increasing debt -- will help you avoid the pitfalls of emotional trading that makes markets so volatile. Going back to this thesis and reaffirming the reasons for purchasing will give you confidence in keeping those six winners out of 10 -- and help you identify the four losers before they hurt you too badly.
4. Keep a journal of my picks
Along with creating and following an investment thesis, it's good to review thoughts you've had on particular stocks, potential changes to your thesis, and the performance of potential portfolio picks. For me, some of this journaling will be done online and on the computer, like reviewing potential portfolio picks with our Motley Fool CAPS community that allows members to pick stocks to outperform or underperform the market. For example, I believe that Astronics (Nasdaq: ATRO ) , an air and defense supplier with a diversified customer base, will beat the market over the next three years -- and I made the corresponding CAPScall on my CAPS page. Keeping a journal is an easy tool to track my progress as an investor, learn from past mistakes, and hunt for future stocks.
5. Keep having fun
You may have started investing on your own to outperform the market. But with each stock you pick, more research is required, and if you don't enjoy learning about how a company operates or speculating on the future market opportunities, investing can become a tedious chore. For me, I enjoy sitting down with a fresh 10-K, and the fact that I can both learn about a company while improving my financial standing is another reason I love investing.
I encourage you to adopt any of these when coming up with your own list of resolutions. Along with these timely resolutions, check out our free report for the New Year: "The Motley Fool's Top Stock for 2012." This free report details our chief investment officer's most promising pick!