written by reader Just For the Record


By theblindsquirrel, February 20, 2014

[Ed. note: Today we have another article from Jim Skelton, the Blind Squirrel, who is sharing his experiences as a financial advisor with us. He has agreed to our trading restrictions, the opinions he expresses are his own, and we haven’t reviewed, approved or screened his ideas. His previous articles can be seen here.

Hello, fellow GumShoers! The Blind Squirrel here once again to share some thoughts and musings I hope you may find help you become even more successful investors.

This month’s article is entitled “Just for the Record.” I’m going to explore some of the many methods I observed investors using to keep good and accurate records of their investment transactions, the way they held their portfolios so as to give them deeper and faster insight as to what was working and what was not, and how they understood what they owned and why they owned it. I found there are about as many ways to go about this as there are individual investors. Some help. Some don’t. I learned by observation that a lot of people simply don’t do enough to keep themselves fully informed and aware of portfolio performance.

To start, I’d like to quote from two of my all-time favorite investment gurus, Peter Lynch and Malcolm Forbes, Sr. In the 1980’s I always loved reading what Lynch had to say about this process we call “investing.” For those of you who were investing in, say, baseball cards or cats-eye marbles instead of tech and telecom stocks back then, Peter Lynch is the guy who ran the Fidelity Magellan Fund in a single-manager format and wove his way through the financial jungle making awesome picks along the way. Investors in the Magellan Fund that held on through all the financial noise of the 80’s made astounding returns for a mutual fund. His style was rather simple and forthright, his writings and advice easy to follow. And he had a knack for stating a complicated thought in a way that was easy for us much lesser mortals to grasp. The quote from him I always keep in mind is: “Know what you own, and know why you own it.” Sounds simple enough, elementary even. But you’d be amazed at the number of people who don’t follow that simple rule.

As for Forbes, Sr., he was fond of repeating a verse that actually comes from the Bible, chapter and verse I forget. He would say, “with all thy getting, get understanding.” He intended that as a life statement, but also as a way to view investments. You must understand what you own and why you own it.

Taken together, these two quotes tell you the same thing in different ways. If you subscribe to the idea that you ought know what you own, why you own it, and understand the reasons behind it all, you may then ask, “OK, Squirrel, so how can I maybe improve my understandings? I do my due dilligence to the best of my ability already. I read and consider the thoughts of other investors about whatever it is I’m considering. I use screening methods to ween out companies that don’t meet my criteria. I look at both fundamental and technical data before picking an entry point when all else gives me the go light. What else is there to do?”

That “what else” can be answered in a single word: records. Keeping good records, that is. Meaningful records of transactions considered, transactions discarded, transactions completed. Meaningful records of the positions you currently hold that give you insight into your positions taken both individually and as a whole. Records that take very little time to compile (we all get weary of doing things that are complex and difficult), records that are based on simple metrics that are easily tracked, and records that, at a glance, tell us important things we might not know as well as we sometimes think we do. Keeping good records of your business will serve you well in the present and the future. And since I just used the word “business,” let me add this thought: If you are serious about becoming a successful investor, building a portfolio that works for you as you would like to see it do, and wind up in your Golden Years living a good life from the income and capital gain that portfolio has created, you must began to view the process as a real business, not a sideline or some sort of hobby. A real business requires discipline, attention, and a plan. Not just a hit-or-miss approach where simple hope is the primary driver. I’ll have a lot more to say about that in some future article. I am passionate about the importance of this subject. But now, back to today’s topic of “records.”

During my career as a Financial Advisor I got to see literally hundreds of accounts as prospects became clients. And if all clients seemed to have one thing in common, it was that they almost always transferred in two accounts: one was the general purpose, taxable, account (held in joint name if married); and the other was an IRA (two IRA’s if a spouse was involved). Two accounts. Holding all manner of investments accumulated over time, intermixed, and the resulting impact each of them had on overall portfolio performance getting lost in the shuffle. From novice to war-worn investor, few could give me a coherent and rational explanation of how and why they came to own some of these positions, and why they continued to own them. If asked, most replies were on the order of, “well, it’s done well for me over the years” or something like that. If I dared press the issue and inquire as to what “done well” actually meant in dollar or percentage returns, things got real fuzzy, real fast. It became apparent to me that, as portfolios grew in size and number, the ability for the investor to really understand what was happening and why decreased in inverse proportion.

But that was back in the day, the days of cash accounts where reporting statements were about as basic as you can get. You just got a paper statement once a month (or maybe only once a quarter) that showed you the name of the position, its current price per share, the number of shares, and the current value. Nothing at all about cost basis, gain/loss, etc. The investor had to keep all those records for herself or depend on her Financial Advisor to do it for them. And if they depended on the Advisor to do so, then later transferred the accout to another broker or firm, those records were generally lost to her. Trying to calculate cost basis and gain/loss was an accountant’s worst nightmare.

But things gradually changed. Brokerage firms began to improve reporting, and from the mid-1980’s, with Merrill Lynch’s introduction of the revolutionary Cash Management Account (CMA), right through today, the statements investors now get are light years better than what came before. And you can get it all online, updated by the minute, not the month. I tell you true, those of you readers who have entered the market in the last few years have no idea at all how great you have it when it comes to information and research abilities. When on occasion I reflect on how much has changed due to the internet and personal computers, I wonder how in the world we ever got anything at all done using pencil, paper, and the post office.

Anyway, I was as guilty as anyone when it came to that two-account arrangement up until a year or so ago. I had my general investment account where I held ready cash and a few stocks, mostly high-risk, potential high-return types. The objective was simple: use this account to buy the things that made my life easier and more fun, and to provide a ready reserve of cash to meet unexpected major expense like the new fridge I had to get last month. And to give me a little latitude to satisfy that part of my personality that likes living on the edge, seat-of-the-pants, speculation that at my age I really ought not be involved in anymore but can’t resist.

But the IRA was a very different situation. Very. While money came and went from the personal account due to different life-altering factors, the IRA changed only due to contributions and investment performance. I had opened it in the late 1970’s with a $1000 contribution and built on that as time and finance allowed. Starting in the early 1990’s I had the opportunity to add much larger sums to it as I changed firms three times and rolled over 401(k)’s. Plus the fact that for the most part I was investing during the Bull Run that was the 80’s and 90’s and benefitting from that circumstance, the IRA had grown quite a bit. After all that time I had stopped using mutual funds as investment vehicles as well as fixed income vehicles (bonds). I was 100% in equities of one kind or another, and, by late summer of 2013, had amassed a total number of 62 positions in the IRA. Now, don’t go gettin’ all excited here. That’s a lot of positions, sure. But most are small in terms of dollars invested. I have “enough” (I hope), but am no seven-figure investor. Hardly. And I finally realized I needed to get a much better grasp of what I owned and why, just as I mentioned when I began this article. I was exactly like the clients I once had.

When I recognized that need to become better organized in order to achieve Forbes’ concept of “Understanding,” I came to the conclusion that what I needed to do was in some way classify my positions so as to be able to group like with like. Once that was done I could then compare results from each category against one another. That way I could tell what was actually driving my overall results, what percentage of my assets were devoted to what classifications, and therefore have an idea of where to redeploy money or employ cash raised from sales. My starting question became: what is a “classification” and how can you separate positions easily into those? What criteria is to be used to create these classifications and how will you separate holdings so the results and performance data for each is easily seen?

What I’ll now show you is the actual process I used and where it led me. I recognize that the way I went about it was appropriate and meaningful to me. If you choose to adopt some similar approach and apply it to your investment positions, you may well use different criteria, different classifications, etc. There is no “right” way to do this, other than what is right for you.

Creating Classifications

Step one in creating these classifications is to determine what metric(s) you want to use to differentiate one company from another. Being a simple kind of guy, I wanted to employ that age-old K.I.S.S. principle of, yes, keeping things simple. I thought through what aspects of an investment were important to me and arrived at an answer that would allow me to segregate one type from another easily and quickly. That primary criteria is