Consistency and Management: Two “Secrets” to Investing Success

I’m going to share with you the big secret to investing success: There is no secret. Rather, there’s no “one-size-fits-all.” There’s no Holy Grail.

Investing success is based on following principles and following them religiously. We’re not machines, and you can’t program us to all trade the “best” way, because there is no best way. We can only find which principles matter to us, and stick to them.

That’s why the biggest impact on your portfolio has more to do with a consistent process and how you manage a position, not the actual securities you trade. My own methodology relies on both long and short investing. In general, they are complementary to each other. When one doesn’t work, I have the other.

The key here is that I know when to short a trade, and I know when to stick around awhile longer. I consider all of my variables, and I stick to that style consistently. There are times when your personal strategy might under-perform. By the same token, sometimes just a few trades account for the majority of your returns.

I don’t mean a person has to immediately decide what kind of investor they want to be and follow that to death or glory. This can take years to solidify. But once you know what works and what works for you, you don’t let a few losses deter your style. That’s why consistent, unemotional application is crucial. The problem for most people is, they get too attached to their stocks.

Visit any message board and you’ll find it full of people cheerleading their positions higher. While they’re busy waving their pom poms, they usually miss the warning signs that danger is right around the corner. That’s because emotion leads one to do the wrong thing at the wrong time.

A consistent, well thought out process can help you avoid getting caught up in the emotional rollercoaster that is the stock market. The important thing is to not obsess over short-term swings in performance or gyrations in the market.

To me, a stock is a trade, nothing more. You shouldn’t own Deere & Company stock just because you like their lawnmowers. Bearish or bullish, owning a stock is just an expression of a trade. The notion that you own a piece of a business just because you own a few shares is total lunacy. Unless you can effect change in a corporation, you don’t own anything.

I could care less what a company does, who owns the stock, or how qualified the CEO is. If it looks like the stock’s reported numbers aren’t being represented in the proper light, then I’ll short it. I think of it like a game of blackjack where the odds are already in my favor. I know when to hold, and I know when to short. That’s my edge. By playing as many hands as possible, I’ll have some bad runs and lose money — everyone does — but over time, my edge will take hold and I’ll end up ahead.

Of course, you should never go in blindfolded. Just because you have a style that works, doesn’t mean you don’t practice good risk management.

For starters, never take too big of a position. No stock position should keep you up at night, lead to excessive stress, or create problems in your relationships or marriage. If you’re worried about the stock, then the position size is too large. Start small — you can always add to the position later!

Another way to reduce worry is to use protective stops. If the stock hits your stop, get out and reassess. Don’t let a small loser turn into a huge loser. You can always get in later after you’ve looked at the situation more objectively. What you shouldn’t do, is add to a loss assuming it’ll climb back up any day now. That’s wishful thinking. The market will tell you quickly whether you’re right or wrong. Meanwhile, if your winners are winning, leave them alone! They’ll pick up the slack.

In my opinion, that’s the secret. Consistently apply your process and use proper risk management so you don’t get carried away with your bets.

I stress risk management’s importance in What’s Behind the Numbers?, where I show you how to identify a stock that could potentially be poisoning your entire portfolio. Dent Research is offering to send you a free copy of the book. You just pay the $4.95 for shipping. With it, you can determine which of Wall Street’s “winners” you actually want in your portfolio.

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Categories: Investing

About Author

In 2007, John Del Vecchio managed a short only portfolio for Ranger Alternatives, L.P. which was later converted into the AdvisorShares Ranger Equity Bear ETF in 2011. Mr. Del Vecchio also launched an earnings quality index used for the Forensic Accounting ETF. He is the co-author of What's Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. Previously, he worked for renowned forensic accountant Dr. Howard Schilit, as well as short seller David Tice.