3 Simple Ways To Beat Other Private Investors

Maynard Paton

By

Maynard Paton

Published in Investing on 4 January 2012

These tips should prevent a portfolio nightmare extending into 2012.

So another year starts and, with our minds refreshed following the festive break, it's time once again to do battle with the market.

Only this year, we might not be feeling all that positive.

You see, the 5.5% drop registered by the FTSE 100 during 2011 translated into some hefty losses among us private investors. My own small-cap portfolio was thumped last year and a quick search shows losses of up to 45% were registered by Fools brave enough to provide year-end reviews (here, here, here and here).

So what can we do to prevent 2012 becoming another nightmare year? There are no guarantees, of course, but I think adopting these three simple suggestions should help you beat most other private investors if the market falls further.

1. Think a lot more about selling

One of the most instructive articles I've ever read on investment is The Loser's Game by American indexing guru Charles Ellis. To cut a long-ish story short, the article outlines superbly how successful investment -- at least for us amateurs -- is often more about avoiding major losers than picking great winners.

So while this time of year is ripe for share ideas and everybody else is busy thinking about what to buy, I recommend spending more time evaluating your current holdings and considering what to sell. As Charles Ellis wrote in his article: "Almost all of the really big trouble that you're going to experience in the next year is in your portfolio right now."

Indeed, further economic/eurozone/banking problems during 2012 may once again highlight weak links in your portfolio. I suspect those holding Lloyds Banking (LSE: LLOY), Thomas Cook (LSE: TCG) or Cable & Wireless Worldwide (LSE: CW) last year would agree.

2. Limit your portfolio/trading

One of the brave Fools posting his 2011 portfolio review concluded: "Doing nothing is invariably more profitable... A lesson that I am continually reminded of but, suffering from the 'human requirement' to be doing something, I seem to struggle with this aspect of investing."

So, as well as calculating your actual percentage gain (or loss...) for 2011, determining what you would have gained (or lost...) had you done nothing last year may be quite an eye-opener.

Indeed, billionaire investor Warren Buffett has for years banged on about punchcards and limiting your portfolio to only your very best ideas. By adopting such a careful share-picking approach yourself, I'm sure you can cut out all the punts, gambles and flyers that so many other private investors like to dabble with -- and lose on -- during times of portfolio boredom.

I'm sure it's no coincidence the best portfolio write-up I could find -- up 4% last year -- involved what appears to be a largely passive strategy. Of the 36 shares this portfolio held at the start of the year, just two names were replaced with new selections.

3. Don't become distracted by the gloom

Now there are plenty of worries in the market at the moment, including the fate of the euro, the US debt ceiling, Chinese house prices and further tension in the Middle East. Problem is, trying to accurately predict how all those troubles will pan out is far beyond most of us time-strapped investors.

And even if you could foresee where the world in general was going this year, you'd still have to pick the right companies at the right price. Legendary fund manager Peter Lynch sums up my advice best by recounting: "I've always said if you spend 13 minutes a year on economics, you've wasted 10 minutes."

Fact is, there are always good companies selling at attractive prices in the market, no matter how many persuasive macro predictions can be found on the bulletin boards. For instance, Shire (LSE: SHP), Next (LSE: NXT), ARM (LSE: ARM) and Tate & Lyle (LSE: TATE) registered 30%-plus gains throughout 2011, while a further 35 blue-chips recorded positive gains as well.

My final bit of advice, then, is not to become distracted by Europe and so on, and end up with too little time -- or inclination -- to pinpoint the bargains that are bound to arise during the next 12 months!

Attention! Hunting for stock-market winners is one of the Ten Steps To Making A Million. You can download your copy of the Fool's latest wealth report for free -- with no further obligation!

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Comments

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Karellan 04 Jan 2012 , 6:14pm

Good article indeed, in my humble experience these points are exceedingly true.

spyknife 04 Jan 2012 , 11:04pm

What a load of crap ! He may as well written "your damned if you do and your damned if you don't"

goodlifer 05 Jan 2012 , 12:05am

" It's time once again to do battle with the market."

Doesn't it make more sense to co-operate with the market?
How?

One way might be to buy decent companies at bargain-basement prices so that you enjoy high yields.

ponym 05 Jan 2012 , 12:36am

I'm sure it's no coincidence the best portfolio write-up I could find -- up 4% last year -- involved what appears to be a largely passive strategy.
Why do I need to compete with other investors?
Are you some kind of sponsered clairvoiyant? ....,who's forgotten the art of helping people in need of investment advice!


ponym

Hannibalis 05 Jan 2012 , 8:49am

Good points Maynard. A tough year - unless you were invested in gold and gilts! I only just about stood still. I avoided TCG but not CWW:

http://www.the-diy-income-investor.com/2012/01/portfolio-performance-in-2011.html

TMFMayn 05 Jan 2012 , 10:40am

Hello ponym

Why do I need to compete with other investors?

Well, taken together, other investors are the market. And though it may not seem like it, essentially we are all competing against each other in terms evaluating companies, news flow, balance sheets, price charts and tea leaves. So if most other investors are beating you in their evaulation and therefore making more money than you, then I'd have thought you'd be better off in a tracker that reflects the market average. My three suggestions were simply ways that I felt could help the ordinary punter outwit most of his rivals, that's all.

Mayn

InvestElf 05 Jan 2012 , 11:10am

Maynard

I enjoyed this article, thanks.

Appreciate the link to 'The Loser's Game.' I agree that it is very insightful and expect it to influence my thinking.

Cheers

M.

goodlifer 05 Jan 2012 , 1:14pm

Mayn

"So if most other investors are beating you in their evaulation and therefore making more money than you, then I'd have thought you'd be better off in a tracker that reflects the market average."

Who cares about the market average?
If I just get a decent return - say 4-5% or more - on my money, together with protection against inflation, I'm more than happy.

Why should I grudge you, or anyone else. your ten, twenty or fifty per cent if that's what turns you on?

snoekie 05 Jan 2012 , 3:10pm

I suppose this is correct in the sense when we see a good opportunity, did we see it early enough to beat other investors by getting the investment at a cheaper price than a week or two down the line?

Otherwise I do not see myself in competition to other investors.

We each make our choices which a number of people would not necessarily agree with and proceed. Day to day others may be right, but long term the position may be different.

Isn't the headline somewhat disingenuous? We are all in competition with each other, wages, place to live, cars and other trappings. On wages we want more, and on the other items the bargains (well most of us) how much can we get them for, less than what it will cost others.

longpod 05 Jan 2012 , 4:41pm

I seem to remember from a previous article, that an index tracker also consistently underperforms the market.
Perhaps you could offer more information about how much underperformance in our own portfolios we should allow for before we are actually failing to keep up.

chubbybrown 05 Jan 2012 , 6:36pm

I dont keep compete with other Private Investors, If anything 'we' are competing with faceless suits

jaizan 05 Jan 2012 , 7:03pm

Those who are not concerned with beating other investors and accept market averages might as well buy a very cheap tracker & quit reading Motley Fool.

The rest of us can carry on working at or towards beating the market/

goodlifer 05 Jan 2012 , 8:31pm

jaizan

"Those who are not concerned with beating other investors and accept market averages might as well buy a very cheap tracker & quit reading Motley Fool."

What's beating other investors got to do with market averages?.

If I'm happy with what I get why should I mind if you get more?

Why should I buy a cheap tracker/
Why should I quit reading Motley Fool?

ANuvver 06 Jan 2012 , 7:24am

I'm with goodlifer on this one.

The reason I got into all this was getting fed up with professionals skinning me on costs to broadly track the FTAS or the Russell. I felt resentful about funding ill-fitting suits, restaurant jollies and season tickets in from Kent. And training programmes to teach them how to manage my money. Didn't see why I should fund an overworked IT department and in-house PR and publishing division. A charming quarterly hard-luck story in a bit of posh embossed cardboard, replete with pics of happy affluent people idly skimming stones out to sea? Thank you, no. I can monitor my investments at 15 mins remove on a £500 laptop kitted out with OpenOffice.
(NB A Fool's best friend is their spreadsheet. Learn how to teach it tricks and it will love you back.)

The only thing I'm trying to beat is the best savings account out there. It's an easy target, but I still have to accept risk to do it.

5% income plus inflation-proofing on capital and I'm winning my own little game. Anything more is a welcome bonus.

The difference between me and the professionals is that if anyone's going to get a bonus for beating the benchmark it'll be me. And if tits go up, what comeback would I have had against the grey army from Orpington anyway?

If you do want to frame the issue in terms of competition, then we PIs have one crucial advantage over the industry. Time. If we don't use that to best advantage, we're just fodder for the machine.

digitaria 06 Jan 2012 , 10:16am

"The Loser's Game" is interesting, but it could be summed up by the words "This Time It's Different". The paradigm, the author would have you believe, has shifted.

Those are supposed to be the four most expensive words in the English language. Do we accept that this time, it really is different?

ANuvver 07 Jan 2012 , 3:59am

I looked at "Loser's Game" too.

While I applaud the principle of "stick to doing the right thing and it'll come good", the article reminded me of the concept of prophylaxis in chess.

Keep yourself secure and flexible, and wait for your opponent to make a mistake. Or, in some cases, bore them to the point where they get frustrated and overreach. Nowadays, I'm much more Karpov than Kasparov (and I never thought that would happen.)

This presupposes an opponent that is going to react to your actions. It also presupposes a definite outcome, a winnable goal. Neither of which, I reckon, apply to financial markets.

So, while it was certainly an interesting read, I think it was flawed from the start and yet another piece of academic puff aimed at the latest generation of MBAs.

Maybe they'll all be charging around Wall Street spouting tennis analogies for the next five years. Good luck to them. I might ride the currents here and there, but I'll be happily positioned on the sidelines when the "paradigm" falls apart.

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