by Alexander Green, Chief Investment Strategist, The Oxford Club
Friday, November 2, 2012: Issue #1895
The other day I received an angry letter from a reader. He was upset about the performance of some of the stocks in The Oxford Club’s Trading Portfolio.
Any stock picker is used to hearing complaints. It goes with the territory. But this reader detailed each losing trade over the last few years and said he was “losing thousands more” on a current recommendation. He added that I needed to shape up or he would ship out.
Strong words. But I’m guessing this reader will never be happy or successful owning individual stocks. Let me explain why. Because if you fall into the trap of thinking the way he does, you’ll face the same potential problem.
I should begin by pointing out that our Oxford Club Communiqué is ranked among the top-performing investment letters in the nation over the last decade by the independent Hulbert Financial Digest. We have taken dozens of profits in recent years, but this reader mentioned none of them. He expected all winners. He didn’t expect any losers.
‘The Nature of the Game’
That was his first mistake: unrealistic thinking. Ted Williams was the best hitter in baseball. But even .400 hitters don’t get a hit more often than they do. That’s just the nature of the game.
If you buy individual stocks, you will have losing trades from time to time. Expect it. Even the greatest investors make missteps from time to time. Warren Buffett, for example, lost his shirt in U.S. Airways, causing him to ask, “What’s the quickest way to become a millionaire? Start as a billionaire and buy an airline.”
If my correspondent misremembered our past recommendations, his assessment of our current portfolio was just as wide of the mark. Our Oxford Trading Portfolio has 22 positions. Twenty-one of them are profitable, including four triple-digit gainers of as much as 185%. Our one losing position is down 8%.
But this single loser irritated the reader enough for him to write. And in some ways, I understand. Losses – even if temporary – can be frustrating.
But imagine if he owned all these recommendations in a single portfolio and only saw not the individual share-price fluctuations but just the change in the portfolio value at the end of each day. Then he would likely be happy, seeing his total value rise but not knowing which stocks were up and which were down.
Don’t Be ‘Consigned to Mediocrity’
This is exactly the experience of mutual fund shareholders, who only see the portfolio’s net asset value change when it is posted at the end of each session.
This passive approach is the way the majority of stock investors put their money to work. And, yes, equity funds offer convenience, diversification, and professional management. But the downside is high fees and mediocre performance. History shows that three out of four mutual fund managers cannot outperform an unmanaged benchmark each year. Over the long haul, more than 90% of them can’t.
In addition to high fees, these shareholders won’t enjoy the outsized winners that can cause a concentrated portfolio of stocks to generate superior performance, as The Oxford Club’s has for more than a decade now.
Big fees and lousy performance is the trade-off for equity investors unable to tolerate the occasional losing trade or to put their portfolio in perspective.
If you can overcome these mental hurdles, you can own individual stocks and enjoy much better-than-average returns. If you can’t, you may be consigned to mediocrity.
That’s a high price to pay for being unable to change your perspective.