If you've been hankering for a good page-turner of an economics book (and who doesn't?), I've got one for you: Tyler Cowen's Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist. Cowen is a hard guy to define: He's a respected economist, a well-known blogger (at marginalrevolution.com), an expert on ethnic restaurants, an art collector, and more.
Reading this latest book of his, I was struck by the good investing guidance it offers, even though most of the book doesn't really deal with investing.
Be smart with art
I was reassured to learn that even Cowen, who visits art museums frequently, can't take too much in at one time: "Two to three hours is my limit ... I get 'museum legs,' my back hurts ... I start to whine."
So what does he recommend? Well, several strategies. For example, in each room of the museum, you can ask yourself which picture you would steal. Thinking about the art in the room this way will help you think more critically about each piece, in comparing it with the others.
At auction houses, pretend you have a certain sum of money to spend. You'll have to decide which pieces you like enough to allocate some of your limited money to. This kind of approach can keep you from just concluding, "Ehh ... they're all kind of nice."
The paintings in your portfolio
Now let's switch gears. We can apply Cowen's museum approach to our portfolios to improve our performance. How? By being more selective. If you're inclined to invest in 10 different companies because they all seem rather compelling, think again. You probably already own a bunch of stocks, right? So you're considering adding a lot more to your mix. Are the 10 new ones all similarly exciting?
Pretend you can invest in only three of them, or perhaps five. Now do some more research and think about each of them. Odds are, you'll end up more convinced about a few of the 10, and you'll likely do best to invest in those than in all 10. (Another benefit is that you'll end up with fewer different holdings in your portfolio, making it easier to keep up with them. Because you should be keeping up with your holdings' earnings reports and annual reports and news stories -- and that gets harder as you own more. Trust me.)
Apply this strategy now to your entire portfolio -- the stocks you own, and the ones you plan to buy. Decide which 10 or 15 are your best ones, and consider keeping most of your money in your best ideas. (If you're making these determinations without any research or much thinking, don't bother, though. This is more important than a fantasy art collection.) You can do the same with mutual funds.
Warren Buffett's rule
This kind of selectiveness in investing isn't a new idea. And it has the most respected of advocates. Warren Buffett has suggested imagining that we have a lifetime investing card that allows us just 20 punches on it. This would force us to be very selective about the stocks we buy -- probably with good results.
You'll find many mutual funds that believe in focusing, or concentrating, their holdings. The Fidelity Focused Stock fund (FTQGX), for example, owns about 50 stocks, compared to other funds that own hundreds. Its turnover is high, but its returns are impressive, averaging 15% annually over the past five years and 18% over the past three. The stocks that the fund's managers think are worth stealing include Hewlett-Packard (NYSE: HPQ ) , ExxonMobil (NYSE: XOM ) , Fannie Mae (NYSE: FNM ) , Comcast (Nasdaq: CMCSA ) , and Freeport McMoRan (NYSE: FCX ) .
Being selective will improve your returns -- and your museum visits!
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