This is the second piece of the Portfolio Management series. I started this series mostly to record what I have learned in last few years since I wrote Stock Lessons (as a beginner). The stock market since last year is humbling, but I also learned quite a bit in the process, with some real results. For instance: my stock portfolio is up about 51% YTD (year to date), vs. Dow’s +6.21% YTD, and S&P 500 +11.16%. Note I only use cash account and only long stocks in my account.
One thing I learned more recently is always keep some cash at hand, I can think of two reasons:
1) This one is easy, if I have some cash at hand, when some good stocks really go on sale (like at March 5 market lows), I can pick up them and feel good about it.
2) The second reason, which is not as obvious, is that if I have some cash at hand, I would not feel compelled to sell when the market goes down. Ideally this should not happen if the money I put in the stock market is meant for long term, and if I believe the stocks I hold are good ones. But in reality, well, we all know how scary the stock market was last year after the Lehman collapse, and this March when it seemed the sky was falling. I understand this kind of market does not happen often. But the rationale of “keep some cash” still has its merits, although it’s more from a psychological (feel good) point of view.
The bottom line is, if I know I have some cash in my account (perhaps cashed in some gains from stocks), I can take some loss to offset the temporary paper loss of a good stock (because of the gain), and still feel comforted at heart.
This is also not isolated in the point above, after all, I want to deploy the cash to make more money.
Last but not least, why is portfolio management important? We know why this is important to Buffett (hint, he has a lot of money, and theoretically he has a lot of opportunities). For individual investors picking stocks is always exciting and we can see that from CNBC (esp. programs Fast Money and Mad Money), but very little about portfolio management, besides Jim Cramer’s "Am I Diversified."
Without portfolio management (or cash management) sometimes we could run into liquidity problems and freak out. From a long term point of view, picking good stocks (and buying it in meaningful amounts) is just the start. How to keep it when the stock goes up and down and eventually make money is the hard part.
That’s the main difference between myself and real masters like Buffett.