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Trying To Replace A Stock In Your Portfolio?

|Includes:ED, SO, Terra Nitrogen Co. LP (TNH)

The following is a quick thought from my blog over at wordpress:

I got online this morning and went to NFL.com to look at the news over there. The first headline I noticed was that Emanuel Sanders is returning to the Pittsburgh Steelers. That's the best news of the day for a Steel City fan like myself. The second headline I noticed was: 'Will the Panthers find the next (Steve) Smith?'

Trying to find another player exactly like a previous one, especially a talented unique player is very difficult and it isn't very likely to ever happen. Similarly I have talked with investors who will sell one stock that has done well for them and immediately try to replace it with a similar stock. I have always wondered what my friends who did this thought they were doing, how they really thought they were helping themselves.

As I see it, doing this can be a true hindrance to both an NFL team and a portfolio. Why? Because when you look to replace a specific player or stock you look at only those stocks with similar characteristics as the one you just sold.

For example over the past few years I made a very tidy 50% profit on Consolidated Edison (NYSE:ED), a large safe utility that I happened to pick up at a bargain price in 09. As someone who is familiar with the utility industry and has had lots of experience and success in the area my initial reaction was to try to find another utility to replace it.

Unfortunately the group as a whole is very highly valued at the moment and there are no bargains worth adding in the electric or natural gas field (NYSEMKT:IMO). If I had tried to find a similar stock and add it to my portfolio I probably would have purchased Southern Company (NYSE:SO) as it was large, safe, old and had a good dividend, much like ED. Instead I went a totally different direction and bought TNH, a fertilizer company which is quite a bit more risky and is not at all like ED.

I am up about 20% of TNH. If I had bought SO I would be up, maybe, 6%. I was more successful because I took a wider view of the market and found a better investment than I would have if I had focused narrowly on stocks that were like ED.

Similarly the Denver Broncos, one of the best teams in the NFL, took a good linebacker named Von Miller even though they already had a pretty good linebacking corp. They did not try and fit a need in taking a defensive tackle: Marcel Darius. Since that draft Darius has slipped into mediocrity and Miller has become arguably the best linebacker in the NFL.

So, remember that when you are investing make sure you keep the scope of companies you will consider wide, don't just focus on the companies similar to the ones you just made money on. If you do this you will likely see an increase in returns.

Disclosure: I am long TNH.

Stocks: TNH, SO, ED