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Bottom line is I think the high PE stocks can do amazingly well but will be unable to help a portfolio of similarly priced stocks that don't perform. The market is quick to kill a disappointing high PE momentum stock. Apple is an example of a momentum stock bought at the wrong time and wrong multiple that has been a disappointment in a lot of portfolios. Better portfolios can be made from low PE, slow growth companies bought at bargains. They offer slow but predictable growth, dividends and lower volatility

Hi KitKat,

As I have stated in the past, I don't invest in the integrated large cap O&G producers ("Majors") because IMO, beyond their lower cost of capital (which is a huge advantage), it is a pretty easy case to make the argument that I can build my own virtual major using the typical metrics (reserves, production, growth & discovery potential)on my own for a whole lot less and with a lot more potential for gain.

That's the good news, the bad news (potentially) is that this exposes me to a pretty much steady diet of the Spiffy Pop type issues you describe.

With exploration/discovery potential, production decline issues (It's not always easy to delineate between flush production and more sustainable production with smaller companies with only the spoon fed and often limited information provided by companies), financing issues and simple execution risk both success and failure of your Spiffy Pop nature are common and the smaller the company the more prone they are to it.

Having dealt with these issues for awhile and combining it with the similar experience I gained during the infamous Dot Com/Tech Bubble I have tried virtually everything in an attempt to outsmart the market with what can best be described as mixed results.

Attempts at rigorous DD helped, until it didn't.

Diversification helped, until it didn't.

A basket approach helped, until it didn't.

Focused or concentrated investing (best ideas) helped, until it didn't.

TA helped, until it didn't.

Following Gurus helped, until it didn't.

Watering the flowers and pulling the weeds helped, until it didn't.

Monitoring the macro, markets and sectors helped, until it didn't.

Heck after the tech wreck I even tried the grown up stalwart approach which helped, until it didn't. (2008 anyone)

Well you get my point I hope.


A smarter or less stubborn guy might take the advice attributed to W.C. Fields.

If at first you don't succeed, try, try again.

Then quit.

There's no point being a damn fool about it.


I didn't. :<)

What I have done is settle into investing strategy that attempts to incorporate some of the wisdom of my previous attempts but in essence can be reduced to three key elements.

1. Be agnostic with my investments. What I mean by this is that no matter what I think might happen I should attempt to structure my portfolio in a way that I can benefit or at least mitigate the damage if, make that when, I am wrong. This doesn't preclude me leaning somewhat in a certain direction based on what I think I know, but rather never forgetting, or under-appreciating, just how wrong I can be and how certain it is that at some point I will be wrong. Understanding the type of risk each company represents and how the stock price might be expected to behave in various situations is imperative if I expect to survive and ultimately prosper when the unexpected happens. Of equal importance is to understand myself and my capacity to ride out both financially and emotionally the periods where Mr. Market may vehemently disagree with my thinking.

Finally and this might deserve it's own entry into my "key elements" classification is to never forget just how relatively un-knowledgeable I am when it comes to all of the various subjects (finance, geology, engineering etc) that can have an impact on my investments. I like to tell myself (delude myself?) that this knowledge about how little I know in itself protects me from the onset of hubris, which may have some merit, but the reality remains that I am trying to compete in a realm where the competition, most of it anyway, has and will always have the upper hand when it comes to these skill sets.

2. Respect these investments for what they are; high risk/high reward investments, which are subject to extreme mis-pricing by the markets on a regular basis. My strategy in this regard is simply to constantly attempt to de-risk my portfolio by harvesting profits when I get them and for the most part at least, incorporate my "agnostic" approach even with my most cherished winners. I've had too many situations in the past where I deluded myself into thinking my winners had offset my losers only to have that winner "Pop" in the wrong direction as well. I am now at the point where if I have a sufficiently negative "Pop" in my portfolio from one stock I'll "punish" myself by selling a winner just to insure that I have better control of the risk that remains in my portfolio(s). Over time, this has resulted in a somewhat "water your winners and pull the weeds" situation where my emphasis on de-risking my positions has allowed my biggest winners to achieve overweight positions in my portfolio even after completely de-risking the position (negative effective cost basis)although at the price of recalling forlornly how many shares I once held and thinking about what might have been. At the same time this has made it easier for me to make the emotionally tough decision to admit I was wrong and pull the plug on my losers and move on. Importantly, although it is impossible to quantify, is the psychological edge (calming affect) it appears to give me in making decisions as I deal with the daily volatility and angst that comes from being in the market.

3. Cash is king! Obviously cash reduces the risk from being in the market and assuming I am successful in altering the high risk/high reward equation through my attempts at de-risking my positions then the remaining high reward portion can easily (in theory anyway) compensate me for the opportunity cost potentially lost through holding cash. This in turn opens up the opportunity to either capitalize on the extreme mis-pricing opportunities that may crop up in individual companies on any given day or in correction opportunities that arise along the lines of the "bird in the hand" thread Rich started. Unfortunately, cash isn't fool proof, for example my biggest loser last year came from my attempt to catch a falling knife and about all I can say is when I screw up deploying cash the next attempt involves a more stringent risk/reward hurdle before deploying more cash.

I know none of this is rocket science and likely sounds somewhat touchy feely/amateurish vs. the Graham & Dodd approach practiced my most inhabitants of this board. I also know that "until it didn't" is always a possibility once again. But for the past several years it's served me extremely well, (although there have been moments) so unless proven otherwise I'm sticking with it.

In a related vein, I did a little postmortem on the 2012 NPI portfolio, (which pretty much is a magnet for the “Spiffy Pop” prone picks) a while back which IMO backs up my conclusions pretty convincingly excepting perhaps the relatively small sample size.

http://boards.fool.com/opportunity-costs-30422124.aspx

Just my 2cents on a quiet Saturday morning,

B
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