Traditional Wall Street wisdom has us believe that the key to successful investing is to carefully research and seek out the best companies in the world, buy them when they are “undervalued”, and then hold them forever. Just look at a long-term chart of Microsoft or WalMart. If one had only bought a couple hundred shares when these stocks were $5 a share and held them for 20 years, they would be very wealthy. The problem with this approach is that for every promising stock that soars to the stars, there are a hundred that fall flat on their face or flounder for years. When an investor takes the approach of buying a stock and holding, they are merely hoping that when it’s all said and done, their research was correct and their investment has grown substantially. While it is certainly possible that the research was correct and the stock will perform as intended, there is also a possibility that the research is wrong and 5-10 years or more will have been wasted to find that out. When investors buy and hold and hope, success becomes more of a function of luck than through any action that was taken.
The successful investor doesn’t rely on luck for their success. They proactively monitor their stocks to see if they are performing according to plan. Successful traders aren’t married to their opinion and are flexible enough to change with the market conditions. If a better opportunity comes along, the winning traders doesn’t hesitate to cut the lagging stocks in their portfolio to take advantage of a superior prospect. Managing a portfolio can be thought of like taking care of a garden. If stocks aren’t tended to on a regular basis, before you know it, the garden is overrun with weeds. Which stocks are the weeds? The ones that fail to keep up with the market or their peers. The market, through it’s auction pricing action, will indicate which stocks are the winners and which ones need to be removed. In a portfolio of four stocks, if one has been sitting there floundering for months without gains, while the rest are marching higher, it’s a weed. It doesn’t matter how good the fundamentals are or what some Wall Street guru said about its prospects, the market is saying that this stock is a non-performer. Opinions are frequently wrong, but the market is never wrong. Proactively replace laggard stocks with better acting opportunities. This will ensure that your portfolio isn’t overrun with weeds that will choke out your returns.