Four Tips for Your 2008 Portfolio

Barry Ritholtz has a post up that gives some highlights of his most recent RealMoney article. He provides 13 bullet points for investors and I thought I would add my spin to a couple of them.

First let me say that the utility from this sort of post, from someone who clearly knows and understands more than the average guy, is very beneficial. Why Billy Mays you ask? No reason at all.

The first one is Simple is Better Than Complex. Trying to keep things simple is one of the major themes for my site and strategy. Simple means different things to different people. For some it might mean three index funds, and for some others it might mean 100 stocks.

My starting point is a diversified portfolio with no big bets and no black box concepts that rely on what should work. I tend to agree with whoever said (I think it was Peter Lynch) that you should be able explain the thesis for what you own to a child, or words to that effect. Sounds good to me.

P/E matters less than you think. Amen. This is a point I have been making for a while (here is one post from a year and a half ago). I tend to fall in to the camp that says P/Es help with valuation but are not predictive. Stocks can stay cheap or expensive for years. Check out a long term chart of Wal-Mart (WMT) as an example of this.

Nothing is more costly than chasing yield. Adding yield to a portfolio is not chasing yield. I think of chasing yield, for example, as adding 15-20% into the royalty trusts because of the yield. "If they drop 10% or 15% it'll be OK because of the yield." A year ago they got crushed on news of tax changes. The person who owned one at a moderate weight had a bad day or two, the person with 20% of his portfolio in them may have undone more than a year's worth of gains. Check out Penn West Energy Trust (PWE) and Pengrowth Energy Trust (PGH) as examples.

Risk management matters. Hello! It might be correct to say I have bludgeoned readers over the head with this point in 2007. Barry's meaning might be a tad more trading oriented than mine, but whatever you do in your portfolio you take some sort of risk--that is to say you are vulnerable to certain things. Know what you are exposed to, have something planned out ahead of time to address that risk, and then stick to it.

Good stuff Barry, thanks.

Comments

[Georealist]

Chasing yield means what? Citi yielded in the 3.5% range and could hardly be called a yield chase..yet it has fallen more than PWE..which has rising asset bases (oil and gas) to easily support current yield and yield growth.
As for PE..PE has been an antiquated analystical device and analyzed to death for decades. The conclusion..low PE stocks are great unless they're not..in which case...don't chase yield!?
Read The Zurich Axioms by Max Gunther..an old, time tested and very wise piece of investment experience.

[granger]

I am one of those 100 stock guys. But, i have had great success by taking small positions with extreme diversification. No one idea is allowed to blow me out of the water. The when I do get a real winner, i may sloly add to it over time. Again it is kept small, so instead of 100, I may 99, with adouble weight for example. I stop at double as a rule for safety and diversifications sake

[RogerNusbaum]

I think my example of chasing yield was reasonable clear and had nothing to do with buying a bank stock.

not everyone agrees with you about PE, i do, but plenty don't which is the point of including it.

the notion of owning 100 names for the reasons you cite are very reasonable, i think i take a similar approach but with closer to 40-45 names.

I can't say 45 is right and 100 is wrong of course but I would think it would be much more work?