One of the mistakes we made with the Foolish Four was treating it as a stand-alone strategy. Since it invests strictly in undervalued companies, it is very vulnerable when the market is in love with growth companies. That can change in a flash, however, and when it does, owning some value stocks should pay off well.
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Luckily, I can also say that a bad day, or even week or month (haven't tested years yet) doesn't bother me. That's not very rational. If a good day makes me happy, a bad day should make me sad or even a bit depressed, shouldn't it?
No one ever said emotions were logical. I seem to have a built-in glass-half-full attitude. When the market is down, I don't worry because I know that ups and downs are normal. Over the long-term, I have faith that my portfolio will go up. But, when we have a terrific day, yeah, I feel pretty good.
I know other people who are just the opposite. Good days always seem to be aberrations. When they have a good day, they don't feel good, they feel like it's a mistake. But, when they have a bad day, they feel terrible, like the market will never recover and they are doomed to a cat-food retirement -- no matter what logic tells them.
All of this is an excellent argument for ignoring your portfolio except for those few days a year when you make trades. Of course, if everyone followed that advice, The Motley Fool would be out of business, and I really would be depressed. But, given the nature of human nature, I think we are fairly safe.
Yesterday was mildly unpleasant with the Foolish Four dropping 1.24% even though the Dow was up a bit, less than 1%. With the market euphoria about the J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> and Chase Manhattan Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> merger abating, our one winning stock has slipped back, and the portfolio is no longer beating the markets.
I'm pretty convinced that we won't see this portfolio beating the market very often until there is a swing back to value-style investing. That's another good reason not to watch your portfolio too often. It is also a good argument for diversifying into growth stocks.
One of the mistakes we made with the Foolish Four was treating it as a stand-alone strategy. Several years ago, that seemed like a reasonable thing to do. You could look at the historical returns and see that, while it didn't beat the market every year, it usually beat it over five- or 10-year periods. All anyone needed, it seemed, was the proper long-term attitude.
Having lived with a period where the strategy wasn't beating the market (and, in the case of some Foolish Four portfolios with a different mix of stocks than the real-money portfolio below, losing serious money) and having seen how people react, I've realized that it's just too much to expect most people to stick with a strategy when it loses money right off the bat. That's real and concrete. The possibility of a future recovery is just conjecture.
As part of a portfolio of strategies that is designed to work under different market conditions, initial losses would be easier to take, though. Your expectation would be that the growth stocks would carry your portfolio when growth was in vogue, and the Foolish Four would come to the rescue when too much growth investing leads to severe overvaluation of growth stocks and the inevitable correction.
Remember, markets tend to drift into the growth part of their cycle but crash into the value part of the cycle. People invest in growth stocks when they are feeling positive about the future, when the economy is strong, when companies are making enough cash to fuel fast growth.
Eventually that leads to overvalued growth companies, and something -- a recession, an oil crisis, a war -- can change the market's mood seemingly overnight. All of a sudden, those great growth stocks can't deliver the earnings to justify their high prices anymore, the future looks bleak, and before you know it, money flows out of the growth stocks and into neglected and cheap companies that have been steadily churning out modest earnings year after year.
When that happens, it pays to already have some cash in those neglected companies for two reasons. First, you won't need to sell your suddenly devalued growth stocks (that will probably come back given time) to raise the cash for value stocks. Second, you will likely be in at a lower price than all those guys taking losses on growth stocks and throwing their cash into your value stocks. With a little luck, you won't have to do much at all. The market will do it all for you.
Fool on and prosper!