I've been investing in tech stocks for the last 12 years, and I've earned a total return of 45% in that time, 79.9% in the last four years, and 98.5% this past year. My goal when I began this experiment was to beat the average mutual funds with a limited number of tech securities. I have, by more than 300% (and I've sent my quarterly reports to Mark Hulbert's Financial Digest, for the record.)
If you think about the key to my investment record, you will realize it is nothing but common sense based on familiarity with the computer technology sector.
The strategy is very important, but what is more important is the kinds of stocks you choose to buy.
Surely you are aware of the fact that the average mutual fund has lagged the market. A recent study revealed that even the index funds beat their average non-index brethren. Some of the best fund managers think it is an achievement if they beat the market averages by a couple of points.
Why do you think the mutual fund industry as a whole has such a poor record, and on average, the funds don't beat the market?
And how is it that I can beat the average fund by more than 300% over twelve years?
It really is very simple. The Funds don't have it easy.
The mutual fund industry has to operate under difficult conditions with both hands tied behind its back.
These restrictions and limitations usually imposed by their charters vary widely, from the obvious restrictions of sector funds to specific sectors, to specific geography, minimum diversification, maximum percentage holding per security, minimum cash requirement, and so on. In addition, the race for short-term performance has affected many funds negatively. Moreover, in order to keep within their charter, which permits only a certain percentage position in any security, most funds are forced to cut down the positions of their big winners in order to stay within their limit for individual holdings. Of course, the ugly ducklings do not present a problem and can therefore be held. This is especially true for index funds. Since there is no meaningful performance difference over a period of time between index funds and other mutual funds, lets look at index funds.
If you buy an index fund, you buy a whole universe of stocks. You buy the good the bad and the ugly.
Why, for heaven's sake, should you buy the bad and the ugly? In addition, you are buying the same amount of a bad stock as you are buying of a good stock. You are doing that with your hard-earned savings, and that to me seems to make no sense at all. Of course, you can't blame the index funds - they are doing exactly what they promised. So why are there so many index funds? That also has a simple explanation: they can prove they do as well as the average mutual fund. The net effect is totally counter-productive.
While all the above points apply more or less to the non-index funds, the non-index funds with their greater turnover, larger commissions, higher expense ratio, etc. have an additional set of negatives affecting their performance, not the least of which is a higher tax liability created by the higher turnover.
On the other hand, my approach is relatively simple. I've listed the keys, and expand upon them at my site.
Key One: Sector
Key Two: Selection
Key Three: Minimum turnover
Key Four: Concentration
Key Five: Never try to time the market
Key Six: Don't let anybody chase you out of a good stock when it hiccups
Key Seven: Don't panic during a market break
I want to help you avoid these typical mistakes, which most individual investors make.
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