Time spent maintaining the portfolio is relevant

There are two reasons why I invest. Both reasons tie into each other.

The first reason is because I want to realize a return on my capital that is higher than the risk-free rate that I would get at a financial institution. Almost everybody invests to do this.

The second reason is because I find it interesting. I genuinely like going through financial haystacks and finding needles, which is what investing is typically like – the only way to get rewarded is to work smarter (employing computers to automate manual work) and harder (doing things that computers can’t). Most value that an individual investor can bring to their own portfolios comes from the latter part.

I do not “day trade”, although there have certainly been moments in my life where I have traded very frequently (i.e. buy one day, sell the next). I have never actively looked at a chart in mid-day and said to myself “that looks good, it must be going down so I will short”, nor have I employed any computer software to automatically pick off technical indicators. I figure that if others are trading purely on price and volume information that they would have me beat by a mile.

However, an important part of individual portfolio management is that because I don’t have an investment committee, my portfolio has to be managed in such a way that I don’t have to spend too much time to “maintain” it. If I had to actively spend 4 hours a day managing positions then investing would not do me much good. Right now maintaining my portfolio is a simple matter of checking for news and once every quarter, read the quarterly report and see if the financial result is roughly in tune with what you (and not the analysts) had expected.

Out of the 10 positions I currently hold, only two of them I would say that my knowledge of their industries is “less than comprehensive”. By virtue of the fact that I expect to get paid off in those fixed income investments, the lack of knowledge is appropriate since I can spend time doing other investment research.

Screening for candidates and determining when to get into positions is the most time intensive part of investing. In this process you discover candidates, look at valuations, and determine whether something is worth ploughing capital into. If not, what price? If so, what are the exit conditions? Obviously price is one, but another exit condition could be a change to the industry, or some other information that usually is not considered at the time of initial purchase.

There is also the time to know when to not bother looking. The worst trades are marginal candidates that you put into the portfolio just because you want to be “fully invested”. While marginal trades such as these in fixed income securities are less punishing than in the equity world, both serve to deprive an investor of their ability to maximize their returns – having cash in a major down market is the best way of ensuring superior returns.

I have been doing some research, but have found marginal candidates. I don’t have much solid conviction behind this market, other than the fact that it seems to be pricing in an economic recovery which I believe is occurring, but I do not think the market is seeing further out than 2011 at present. 2011 should be a banner year for corporate profits; however, 2012 and beyond will likely be more shakier. One of the reasons is due to inventory buildup. I don’t know if the markets have priced in the post-2011 world yet of “back to normal” tepid growth.

In the meantime, I will continue looking for needles, hopefully not hypodermic.