Wednesday, 29 May 2013

Quote for the day

“Remember the two benefits of failure. First, if you do fail, you learn what doesn't work; and second, the failure gives you the opportunity to try a new approach.” - Roger Von Oech

LSL Market Review 29th May 2013

Colombo stocks recovered today after two days of losses where benchmark indices closed with positive returns. ASI advanced by 21.11 points to close at 6,455.81 and S&P SL 20 Index advanced by 17.68 points to close at 3,644.64. Price appreciations in large cap stocks such as Chevron Lubricants by LKR 6.60, Bukith Darah by LKR 4.20 and National Development Bank by LKR 4.50 contributed positively to the market performances.

Daily market turnover was LKR 906mn. Nation Lanka Finance with LKR 107.3mn, Chevron Lubricants with LKR 73.9mn and John Keells Holdings with LKR 58.7mn topped the turnover list for the day.

Two crossings were recorded by Asiri Hospital Holdings (~1.4mn shares at LKR 15.50 per share) and National Development Bank (~0.2mn shares at LKR 177.00 per share). The aggregate value of the crossings accounted for 6% of the market turnover.

Nation Lanka Finance voting share and the Warrant-21 traded heavily with top trading volumes and ended among the top gainers. Further Land & Property sector stocks such as MTD Walkers, Overseas Reality and Colombo

Land & Development were among the mostly traded stocks during the day.

Cash map closed at 50.8%. Foreign participation for the day was 21% of the total market activity and foreign investors were net buyers with a net inflow of LKR 102mn.

How To Force Yourself To Be A Better Investor

A policy of 'forced displacement' can help you focus your portfolio.
By Kevin Godbold

If, like me, you desire to own a concentrated portfolio of investments, and wish to abstain from introducing new cash into your portfolio, it can make a lot of sense to adopt a policy of forced displacement.

In other words, if you are fully invested with your maximum number of holdings in place, buying a new investment means that you have sell something you currently own!

About two years ago, I decided to work towards concentrating the investments within my portfolio to a maximum of ten holdings.

The decision to concentrate was a product of previous bitter experience. In the past, even though I thoroughly researched each of them before buying, I ended up with far too many shares. It was hard to follow them all in sufficient depth and with sufficient focus, and my performance suffered as a result.

Warren Buffett once frankly stated: "Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing."

He also said, rather more kindly: "Risk can be greatly reduced by concentrating on only a few holdings."

I would add that risk only has a chance of being reduced if fewer holdings leads to greater concentration of thought and focus on your investments.

No new money
As well as concentrating my investments, I decided long ago that no new cash would go into my portfolio (honestly, that was my own decision and not the wife's!).

It seemed to me, that through compounding, it would be possible to grow even modest sums into not so modest sums over the long term. For example, starting with an initial investment of £20,000 and compounding it at 10% for 25 years would give you around £217,000.

Compounding could potentially be achieved by reinvesting dividends and recycling maturing investments into new ones.

The dilemma
All of that works fine until you find yourself fully invested and coveting some sexy new investment that you have thoroughly researched.

Then is the time to be very firm about your investment rules. It would be tempting to sell bits of this and bits of that to fund a new position, but that could mark a return to the bad old days of diluting the portfolio into smaller positions.

You must be ruthless -- if you want to own a slice of the new company, one of the existing holdings has to go.

At that point, you are weighing up the relative merits of one company already in your portfolio, against another that wants to replace it: a potentially more intense exercise than analysing a company's prospects in isolation and then just buying it. It really focuses your mind!

A well-trodden path
Several well-known successful investors have practiced forced displacement in the past.

For example, in Alice Schroeder's biography on Warren Buffett, The Snowball, she quotes him as saying, when talking about his investing in the early 1950s: "I was already running short of money to invest. If I was enthused about a stock I would have to sell something else to buy it."

And, in his book Beating the Street Peter Lynch Says: "Most of my abrupt changes in direction were caused not by any shift in policy but by my having visited some new company that I liked better than the first... In order to raise the cash to buy something, I had to sell something else..."

In my view, in order to be successful, the forced displacement technique must be considered as a kind of 'weapon of last resort' for your portfolio. You do not want to slip into overtrading, with all its associated costs.

If applied properly, it should promote even greater focus and intensity of thought when evaluating an investment opportunity, as to invest also requires you to divest.