The Most Painful, but Necessary Wealth Procedure

I've never had a colonoscopy, but I hear they are painful and invasive. To say they are uncomfortable would be an understatement.

But if you have cancer, the procedure can save your life, by spotting the cancer and allowing for early life-saving treatment. That's the only time you're grateful for such an odious experience.

If you're busy later in life, and you're at the age when you need to start worrying about this sort of thing, it can be easily overlooked. And that may be fatal.

The same thing can happen if you're managing your own money and investments.

The more money you manage, the more important this is

Suffice it to say, if you're active with managing your money, its easy to lose sight of the performance of all your positions, once you've been building them up over a long period of time. You may very well end up, eventually, with twenty, thirty, or more positions in your investment portfolio. Any more than this tends to get precarious. Let me tell you why.

The world of finance comes with complex apron strings. Depending on the amount of time you spend on your investments, you may suffer from information overload. You may begin to forget why you got into an investment in the first place. Trying to balance all these reasons for 30 positions will get difficult.

To be successful, you need to justify every trade you make from the very beginning, and you need to look at each position once in a while, to make sure your reasons for owning the investment make sense. This is the essence of the Wealth Colonoscopy--taking a close, hard look at things to make sure nothing is cancerous in your portfolio.

If the reasons you bought something don't hold up any longer, it's time to make a change. Consider the following introspective questions as starting points for grading yourself. You'll come up with more on your own, but these are my basic "Come to Jesus" questions:

Were the fundamentals good, and now they are horrible??
Were the technicals signaling a buy, which proved to be a false sign?
Was there blood in the streets when you bought, and things only got worse?
Were prices at historic lows, or highs?
Was there risk of default, and a buyer stepped in to clean up?
Was the company trading below book value, and now it’s overpriced?
Was the company planning to sell a billion widgets, but fell far short of that?
Were you speculating, and the reasons are gone now?

Whatever your original justification is, keep track of it. Then periodically, see if your reason still holds up.

My point is, conducting a periodic “audit” of your portfolio is necessary. In other words, it pays to sit back once in a while to see if the conditions underlying your investment theory are still in place or not. To do that, you need to have kept track of your reasons in the first place.

I keep a spreadsheet with information on each of my investments. I refer to it to remind myself why I decided to buy or sell in the first place. As often as I need to, for reinforcement, encouragement, or reassurance, I go back to it and see if the conditions still exist for being in the trade or for having the ability to come out ahead in the end.

And if they don’t exist anymore, I sell the investment the next day when the market opens.

Don't pretend you can beat "cancer" by pure willpower

There’s a saying I like, it probably originated back in the 1970’s or so when stock quotes used to come in through “tape” or rolls of paper with tickers and data on them. The saying is, “Don’t fight the tape.” If you look at an investment you have, and you were wrong... if your theory didn't play out... pony up, admit you were wrong, and get out of the building.

“Fighting the tape”—trying to get the market to agree with you—is a losing proposition.

Behavior like this is akin to knowing you have colon cancer, and not seeking any treatment--or thinking you can beat it by sheer willpower. It's madness.

So you think you’re a black belt Jedi master of market domination, and eventually things will move your way again? It’s possible. But more likely, you need to get your freaking ego in check. The market is always bigger than you are, no matter what you think. Do you think you can demand reasons or answers from the market on why it’s turned against you? Mr. Market answers to no one.

Schedule an audit--a "wealth colonoscopy," if you will--twice a year, or monthly if you are more active in your account.

Don’t let your 22% loser, which you should have cut at 20%, become a 50% loser. Human nature 101 makes us want to ignore our mistakes so we don’t lose sleep over them. My experience is that the most painful mistakes are the most valuable lessons.

In addition to commission costs, margin costs, and PnL costs on a portfolio, there’s a little thin called “opportunity cost.” If you’re holding a position that doesn't make sense, and the money could be better employed in an opportunity that actually exists, you’re better off moving on into bigger and better ideas.

Lesson learned: When you get into an investment, justify it. Review all your positions once in a while, and if the conditions aren’t holding up, dump them. Don’t be afraid of being wrong. Move on to bigger and better things.

You’ll drastically improve your performance.

Live long and invest,

Jeremiah