MARKET COMMENT
How To Start Over Again

By David Kuo (TMFDragon)
June 21, 2004

Learning how to forget the past is one of the most important lessons in investing. For some investors it is second nature. For these investors what has happened previously is of no relevance, and what is likely to happen is really all that matters.

But it can be very difficult to forget the past, because it is always hard to let go of what is old and familiar. That applies not only to old habits and practices but also to shares in our portfolios.

However, being skilled at letting go can have its advantages. After all, if your resources are engaged in supporting what you have, then you are much less likely to look at anything new. We should always try to remember that investing is about putting your money to work. That means looking at opportunities that will deliver the best possible returns for our capital.

That also means looking dispassionately at each of your holdings and decide whether it merits a place in your portfolio. An often telling question is whether you would still be a buyer of a particular share if you did not already own it. If the answer is no, then perhaps you should sell it.

In his book No Bull, hedge fund manager Michael Steinhardt admitted to occasionally starting his portfolio all over again. In one swift move, Steinhardt would sell all his positions, and so have a clean sheet to work with. Steinhardt added that sometime it felt refreshing to rebuild a portfolio from scratch, free from wish-washy legacy holdings.

When investing in the stock market, it can be instructive to regularly write down on a clean sheet of paper all the shares that we would like to own, and why you would want to own them. And, if you find that few of those names appear in your existing portfolio, then like Steinhardt, you should also think about starting afresh.

However, it takes a great deal of courage to liquidate all your shareholdings, and to start anew. For some investors it is tantamount to admitting failure. Sometimes though, it is our reluctance to admit to past errors that is our greatest investing mistake, and not that we may have bought wrong shares in the first place.