It's a tough market out there. Stocks are getting pummeled, sometimes for very good reasons, sometimes for no apparent reason at all -- and they're taking our portfolios down with them.
But don't panic. There's an easy way to turn your portfolio around.
Take it from me
In March 2007, when I wrote "Learn From a Loser," my mock portfolio on Motley Fool CAPS, our online investing community, was in sorry shape indeed. Today, it's firmly entrenched in All-Star territory -- the top 20% of all CAPS investors -- and still climbing. Believe me, I'm as surprised as you are.
I didn't engineer this stunning turnaround by throwing myself into an intensive program of financial study. (Although that doesn't sound like a bad idea, come to think of it.) I didn't ditch my passel of losers for the latest hot properties. And I didn't pack my portfolio with dozens of new picks.
So what did I do? Nothing -- except what I'd been doing all along.
Know what you buy
Stock research may sound like a chore, but when you pick great companies in fields you already follow, it suddenly becomes a lot more like actual fun.
As both a comics fan and a movie buff, I knew earlier this year that Marvel (NYSE:MVL) was in for a big summer. I'd studied the details of the credit facility the House of Ideas had taken out to fund its own slate of superhero movies, so I knew that the company had a lot to gain -- and surprisingly little to lose -- from its big-screen gamble. I'd also tracked the growing positive buzz on the Iron Man movie on film-fan websites, and watched initially bad impressions of the new Hulk film begin to shift toward the positive.
I went long on Marvel last February, and watched the stock price leap by 20% as Iron Man became one of the summer's biggest surprise hits.
Stick to your guns
My core lineup of CAPS picks hasn't changed much from the days when it looked less like the New York Yankees and more like the Bad News Bears.
Although they haven't all worked out, I owe my success to choosing companies I believed in, even when Mr. Market was giving them the raspberry. I knew Costco (NASDAQ:COST) was a fantastic company when I picked it, and I hung on even when Wall Street didn't.
All the factors I noted the last time around -- Costco's principled and responsible managers, steady profits and growth, loyal customer base, and well-treated employees -- haven't changed. But my Costco position in CAPS has gone from trailing the market by 12 points in March 2007 to beating it by more than 20 points today. If I'd cut and run when the market frowned on Costco, I'd have missed out on all those gains.
Set it and forget it
At best, I check my CAPS portfolio every couple of weeks, and I don't sweat over day-to-day fluctuations. Honestly, my first reaction upon seeing I'd reached All-Star territory was, "How the heck did that happen?"
Freaking out over every little swing of the market, and second-guessing your own research (and gut instincts), is the best way to shoot yourself in the foot, investingwise.
Sure, I've closed out a handful of my CAPS picks. Artificial-blood developer Northfield Labs' (NASDAQ:NFLD) slick technology lured me into a deeply uninformed thumbs-up. And I unwisely went thumbs-down on Dell (NASDAQ:DELL), which, like the hero of The Princess Bride, proved only mostly dead. But I only dropped the hammer on those picks when I felt absolutely certain that I'd chosen them for the wrong reasons or completely misread their situations.
In most cases, I've found that leaving my portfolio in peace is the wisest investing strategy.
Sic transit gloria mundi
I'm no investing genius. For every new pick I'm glad I made, like shrewd oil-services firm Dawson Geophysical (NASDAQ:DWSN), I've gotten myself into some real disasters, like homebuilder supply company Builders FirstSource (NASDAQ:BLDR). (I may have been slightly too optimistic about the swiftness of a housing-market turnaround.)
And I fully expect that my CAPS rating may plunge back into the depths of obscurity at any moment. Irrational ups and downs are just part of the stock market. But even if I once again find myself wearing the sad, monochrome jester hat of CAPS loserdom, so what?
I know why I've chosen my picks, I believe in their long-term potential -- yes, even struggling Alon USA (NYSE:ALJ) -- and I have confidence that they'll keep on beating the market.
If you'd like to turn your portfolio around, buy good companies with bright futures, regardless of whether the market likes them right now. Then hold on. It's that simple.
Of course, it never hurts to have a little help -- especially when it comes from Fool co-founders David and Tom Gardner. Their market-beating Motley Fool Stock Advisor service can help you unearth fantastic companies with top-notch leadership, sturdy competitive advantages, and bright futures. You can check out their two latest picks, and all their previous hits (and occasional misses), with a free 30-day trial subscription. Click here to get started. There's no obligation to subscribe.
Fool online editor Nathan Alderman is working with a choreographer on an elaborate CAPS-rating-related victory dance. All the stocks mentioned above are part of his CAPS portfolio, but he holds no real-world financial position in any of them. Costco and Marvel are Stock Advisor picks. Dawson Geophysical got the nod from Motley Fool Hidden Gems, while Dell and Builders FirstSource are Motley Fool Inside Value selections. The Fool's disclosure policy wisely remains humble.
