When checking your portfolio gets dangerous

It's easier than ever to see how your stocks are doing -- and that can mean trouble for investors.

By John Reese Mar 1, 2013 9:46AM

How's the market doing today? How about in the last hour? And your portfolio, which of your holdings is down today?

On the surface, it might seem that knowing the answer to those questions would be a good thing. Being as up-to-date as possible on the market and as to how your stocks are doing means you are putting in effort and being diligent, and that should lead to success, right?


Wrong. Though many investors fret over day-to-day, hour-to-hour, or even minute-to-minute market moves, the truth is these short-term fluctuations, on the whole, really aren't that meaningful. In fact, there is evidence that paying a lot of attention to those movements doesn't make you a better, more conscientious investor; it actually hurts you over the long haul.

In an article written for the American Association of Individual Investors a couple of years back, Mark Hulbert noted that, "According to behavioral finance researchers, constantly looking at how your portfolio is performing is not a benign act. It leads you to focus more of your attention on the short term than you would otherwise, leading you in turn to miss the veritable forest for the trees."


Admittedly, the urge to beat the market every day is hard to keep in check, particularly in today's world. In the past decade it has become exponentially easier to keep an eye on how your stocks or the broader market are performing. Forget day-to-day market updates; now you can get a minute-to-minute, or even second-to-second update on how every stock you own is doing.


But you don't need to beat the market every day to produce great returns -- in fact, you don't even have to come close. My firm, Validea, recently conducted a research study looking at the daily returns of five of the top-performing guru-inspired portfolios we track: our Kenneth Fisher-, Motley Fool- and Benjamin Graham-based portfolios, as well as our Hot List and Top 5 Gurus portfolios which use multiple Guru Strategies to pick stocks.

These five portfolios have performed exceptionally well over the long haul -- on average, they've returned 13.3% annualized since July 2003, while the S&P 500 has returned 4.5% annualized. Given that they've collectively nearly tripled the S&P's gain, what percentage of days would you guess that they'd outperformed the index? 60%? 70%? 80%? Here are the actual percentages:


Hot List Portfolio: 52.78%

Top 5 Gurus Portfolio: 51.62%

Graham-Based Portfolio: 52.33%

Motley Fool-Based Portfolio: 52.16%

Fisher-Based Portfolio: 52.08%

Average: 52.19%

(Data through 2/12/2013)


I don't know about you, but I would've guessed that those numbers would've been significantly higher, given the exceptional performance of the portfolios. Essentially, that means that in a typical month with 23 trading days, one of those portfolios would fare better than the market on 12 days, and worse than the market on 11 days.


This data is a great example of why you shouldn't hyper-focus on your portfolio's day-to-day fluctuations. Portfolios with exceptional performance over the long term still have plenty of bad days. In fact, as you can see, they can have nearly as many bad days as they have good days. What's more, our study found that some of the biggest up days came after a very bad day (or a few), as investors realized they'd overreacted to the downside. Bailing after the bad days can really hurt, because you don't get those bounce-back gains.


Don't get me wrong: It's good to stay relatively up-to-date on your holdings -- and you should definitely be aware of how the companies behind the shares you own are performing, business-wise. But monitoring how much those shares have risen or fallen every hour, every day, or even every week is, in my opinion, counterproductive.

Great stocks of great companies have terrible days, and great portfolios filled with great stocks have terrible days. What matters are the fundamentals and financials of the companies in your portfolio -- over the long-term, fundamentals and financials win out. That point is critical to remember -- and easier to forget, the more you hyper-focus on your portfolio's short-term fluctuations.


With that in mind, here are a handful of stocks that my Guru Strategies like, that are long-term plays. Each has one issue or another, from company-specific issues to geopolitical risk, that makes them vulnerable to some significant short-term ups and downs. But their strong fundamentals and financials mean the odds are good they'll succeed over the long haul, regardless of what happens today or tomorrow.


Questcor Pharmaceuticals Inc. (QCOR): California-based Questcor's shares were crushed last September when it was revealed that Aetna would stop reimbursement for most uses of Questcor's main product, a gel used to treat infantile spasms, multiple sclerosis, neuromuscular conditions and a kidney condition. But two of my models think investors punished the $1.9-billion-market-cap stock too much, which has earned it a place in my Top 5 Gurus portfolio. My Peter Lynch-based approach likes the stock's 0.43 P/E-to-growth ratio (a metric Lynch pioneered) and lack of any long-term debt; the model I based on the approach of hedge fund guru Joel Greenblatt also likes its 14.2% earnings yield and 202% return on capital.


Alliant Techsystems Inc. (ATK): This Virginia-based aerospace, defense, and commercial products firm ($2.2 billion market cap) operates in the U.S. and abroad, with offerings that range from ammunition to rocket motors to aircraft components. It's a favorite of my Graham-based model, thanks in part to its strong 2.76 current ratio and $1.3 billion in net current assets vs. $1.0 billion in long-term debt. The strategy also likes that ATK is cheap -- shares trade for 8.4 times trailing 12-month earnings and 1.5 times book value.


Geospace Technologies (GEOS): This $1.3-billion-market-cap, Houston-based firm makes scientific instruments for the oil industry, using seismic data to find oil and gas. It's a favorite of my small-cap growth, Motley Fool-based model (inspired by Fool co-creators and brothers Tom and David Gardner). The Fool approach likes that Geospace's profit margins are high (18.3%) and have been increasing (17.2% a year ago and 11.0% two years ago). It also likes that the firm has no long-term debt, a 0.4 P/E-to-growth ratio, and a strong 92 relative strength.


Lear Corporation (LEA): Michigan-based Lear supplies automotive seating and electrical power management systems. The $5.2-billion-market-cap firm, which has employees in 36 countries, is a member of my Hot List portfolio. The Lynch-based approach likes its 4.2 P/E and 22.8% growth rate, which make for a 0.18 PEG ratio, and its reasonable 18% debt/equity ratio. My James O'Shaughnessy-based growth model, meanwhile, likes that it has upped EPS in each year of the past half-decade, and that it has some momentum (74 relative strength) but remains cheap (0.36 PSR).


I'm long QCOR, GEOS, and LEA.

John Reese is the founder and CEO of Validea Capital Management and Validea.com and the author of The Guru Investor: How to Beat the Market Using History's Best Investment Strategies.

Mar 1, 2013 10:24AM

Foreign Indices and Bourses, not all that great except the Nikkei...That's been in turmoil for over 2-3 weeks....

Today will be a test for American Markets....Just looking for the Sequester, to only effect what it should and not everything else....

Guess it will depend on the weightings within the Index...??


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