Vinod Kurup

Hospitalist/programmer in search of the meaning of life

Doing Nothing

It’s time for my quarterly investment update. Every 3 months, I look at my portfolio and sell stocks that I don’t like and then buy ones that I do. This quarter, I’m doing nothing.

This is one of the hardest things for me to do. I like to trade. Sell a stock here, buy a new one here. It’s exciting. Especially when you sell a stock that’s been down for a while because then you no longer have to look at that red smirch on your portfolio every day. But while activity is a good thing in almost every other aspect of life, it can hurt you in investing. The undisputable fact is that the more you trade, the more you’ll lose on commissions and spreads. What’s more disputable, but true in my mind is that investing overactivity makes me do dumb things.

A couple of the stocks that I had sold over the past year have made strong runs since I sold them. AMN has gained 47% and DUCK has gained 20%. I probably shouldn’t have sold either of them, if I had followed my strict evaluation process. But I wanted to sell them. Each company had its problems, so I found good reasons to sell and justifed them to myself. The problem was that I didn’t follow the sell criteria that I had set up before I bought the stocks. I made up new ones just so I could sell the stock. If I had stuck with my initial criteria, I’d still be holding on to those two and enjoying my gains.

I guess my lesson is that you should decide under what conditions you would sell any stock before you buy it. Until those conditions appear, hold tight. This is especially true for small undervalued stocks because it can take a long time for the market to come around and properly value them. James Cloonan, over at The American Association of Individual Investors runs a Shadow Stock Portfolio on which my portfolio is loosely based. He recommends giving small-cap value stocks at least 2 years to be recognized by the market.

Patience, young grasshopper!