Investing
= Football
Too
often, investors don’t really understand how to put together
an investment portfolio. Many times it is just a jumble of stocks,
bonds and mutual funds, with no plan or focus. They are there with
just a hope that it will work. Many times, investors don’t
even know why they own an investment or what they expect out of
it.
At
Cornerstone Investment Services, we approach portfolio management
like a coach running a football team.
A
team of just running backs and wide receivers would never win a
single game, yet they are usually the ones that score the points.
Too many times, this is exactly what investors do, they load up
on aggressive growth stocks and then wonder why they get slaughtered
when the market turns down. A team needs the offensive linemen to
do the blocking up front, they need the quarterback to call the
plays and they need a coach to put it all together. And then there
is the defense. What would a football team be without a defense?
The
coach of the team has to see the big picture. He has to see how
things fit together and has to know when to play it safe and when
to go for it. He also has to know when to play defense. A money
manager has to look at portfolios the same way. He has to understand
that he can’t have the offense on the field 100% of the time;
that he has to play defense sometimes. He has to build portfolios
that are not just a collection of stocks and bonds, but a well constructed
assortment of investments that “fit” together.
Players
on a football team are specialized. Almost no one (except Troy Brown)
can play both ways, and few can play more than one position. It
is this way with investments. Too often, investors make the mistake
of expecting the wrong thing from their investments. Many times
they don’t understand the purpose of investment. You wouldn’t
expect Treasuries to double on good earnings news and you don’t
expect hi-tech stocks to pay a dividend.
When
looking at the Cornerstone Model Portfolio, here’s how we
see it - in football terms.
Offense:
TIPS (Treasury Inflation Protection Securities)
– They are doing the same job as the offensive
linesmen. They are protecting the portfolio. You don’t expect
them to score any points, but you are sure glad they are there when
you need them. When bad things happen, investors usually run to
the safest investments. Treasuries are usually considered the safest
investments on earth.
Natural
Resources – This is our running game. It keeps pounding
away, gaining ground as consumption of hard assets keeps rising.
Now and then there is a big run, like when oil spiked from $30/bbl
to $55/bbl.
Trading
stocks – These are our wide receivers. We use them
for both short and long gains. They come into the portfolio for
a specific purpose and then back to the bench as cash.
Hail
Mary’s – Speculative stocks. These work about
as often as a Hail Mary pass, but when they do, they usually have
spectacular results. Rarely used, you don’t expect it to work,
but maybe this time…
Cash
– Cash is the guy on the bench that comes in when needed on
3rd and short. Cash is the back-up quarterback. Cash is the big
defensive lineman you bring in for a goal-line stand. While cash
is sitting on the bench, you don’t expect anything out of
it. But its value is in its availability. Its value is in what it
can do for you when you need it. Cash is respected by the other
players much more than by the fans.
Defense:
Foreign Bonds – Playing defense against a
falling Dollar. As the Dollar falls, interest rates in this country
are likely to rise, slowing the economy and hurting earnings. This
would bring the stock and bond markets down. But the declining Dollar
increases the value of foreign investments.
Gold
– This is the deep safety. He is guarding against a number
of deep threats including inflation, higher interest rates and a
falling Dollar. Nothing gets past him.
International
Equities. These are our corners. They are protecting against
a falling Dollar, but also have the ability to come up and pick
off some points of their own on an interception. As The US looses
more and more business overseas, it is these companies that are
benefiting. They are taking advantage of the growing economies overseas.
They are a double threat, the can make money on the declining Dollar
and from the foreign markets
Hedges
– These are our middle linebackers. They are versatile and
can cover much of the field. We can pick up a specific stock put
option or we can broadly cover the portfolio by investing in index
puts or bear market funds.
Special
Teams:
Punting – It is important to know when you
are beaten. Taking a loss is not failure. Not taking a loss and
getting run over is failure. Knowing when to kick the ball away
is the sign of a wise coach.
Field
Goals – small gains are better than no gains. Sometimes
it is better to go for 3 points than to risk turning the ball over
on a failed attempt at a touchdown.
Penalties:
Holding – This is when you don’t sell
a stock after a nice run-up, only to watch it go right down below
where you bought it.
Too
many men on the field – This is when you have little
or no cash reserves. You need cash reserves to take advantage of
new opportunities or any emergencies.
Interference
– This is when an investor calls their money manager too often
with ideas and suggestions. If you have hired a money manager, sit
back and let him do his job.
Delay
of Game – Taking too long to make decisions.
Unnecessary
Roughness – This is when a portfolio is too volatile.
By making certain changes, or reducing exposure to some sectors,
the volatility can be reduced.
Tripping
– This is when you buy GroceryStore.com at 3 cents/share because
you read on a message board that the management was going to take
it private at $5/sh. Yeah, right!
Personal
Foul – This is when you believe that your stocks
are somehow immune from the precariousness of the market.
Illegal
Procedure – This is when you set up a trust with
the wrong tax ID number or try to have two names on an IRA, or various
other technically incorrect operational faux pas.
As with any football team, you need all of the components for a
successful performance. With a team like this, we are balanced and
able to weather what ever the Bears have for us. We will shift our
players around, sometimes have a little more here, sometimes take
some away from there. But it is always done with the balanced team
approach in mind. We always know what to expect out of our players.
(There
are many other players we didn’t mention like Blue Chip stocks,
growth stocks, REITs and utilities among others. These are all offensive
players that we can’t use right now. The team we are playing
against - the Bears - knows how to beat those guys, so why bother
putting them on the field if they are just going to get beaten?
They are waiting in the wings. They will eventually get a chance
to play, but not until the bears are off the field. )
And
of course...
Go
Patriots!
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