Sunday, August 05, 2007

Bad Week - Words of Wisdom

Apologies for being a little remiss in my posting this week. I was off in NY for the past 4 days attending my nephew's wedding. Beautiful wedding in the lower Hudson Valley, gives me hope for the future.

On the plane ride back, I started reading Ken Fisher's new book, The Only Three Questions that Count. It is quite the opposite from the Dhandho Investor! Good stuff so far, I am about 1/2 way through. One of the questions deals with how to keep your brain from blindsiding your investing. Pretty timely chapter. When the market corrects (as we're seeing now) he argues that human behavior is to focus on your losers ("the dogs") and sell them. This is often the opposite of what should be done and it is important to stick with your strategy and not just over-react to a correction.

I know I have been doing that to some extent, but will try and resist going forward and get back on the plan of holding MFI stocks for a year. That has always been a major appeal of MFI is that it takes the emotions out of the decision-making, and in selling 3 or 4 stocks early I know I was wrong. I did re-invest the money immediately and I did move always into top 25 stocks. But still, I know I was too emotional (I am now rationalizing my breaking the rules).

Enough of that. It was a bad week, though not as bad as the previous week. Perhaps we're through the worst of it. Over my entire portfolio (MFI and non MFI) I have lost 13% of my value from the high on July 13th. That being said I am still up 4.2% YTD. Fisher did explain in his book that people are much more emotional about losses that gains. He said studies show that our happiness from a 25% gain can be wiped out by a 10% loss. Overall you'd still be up, but you would not have the happiness you would have if that stocks had simply moved up more slowly and you were 15% up.

Below is my weekly graph. Sadly, I am now in a virtual dead heat with the benchmark Russell 3000. Over the past 2+ weeks, I have given back my 5% edge. I do believe smaller cap stocks have borne the brunt of the sell-off disproportionately, as there has been a flight to "quality".

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