Re-making Portfolio to ride the Craziness of Market Cycles

Read? Investing Made Simple by Uncle8888 (28)

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"Insanity: doing the same thing over and over again and expecting different results" - Albert Einstein.

               This is how Market Cycles exist?

Market Value of our investment?

When the market value of our asset rises above our initial investment cost, we make an unrealized profit; but when the market value falls below our initial investment cost, we make an unrealized loss.

Does this unrealized profit/loss really matter to us if we are not selling yet and still happy with the cash flow generated by these assets?

Some stocks by nature can be very volatile and their market value can rise and fall quickly over days or even by hours. It is like taking a roller-coaster ride. If we focus too closely to their market value on daily basis, we may be taking an unnecessary and unwarranted emotional roller-coaster ride with the crazy stock market.

BTW, any unrealized gains in our stocks are just paper profits. It is just a number indicated in our monthly CDP statement. We can't buy food with these paper profits which are hiding somewhere in the databases of CDP's computer.

Similarly, any paper losses are just imaginary losses until the companies actually go bankrupt and then only no hope.

Learning from Property investors

Read? Property investors

Most property investors never formally evaluate the performance of their investments on daily basis and they are happy in receiving rentals and paying off mortgages.

For example,

If our neighbour A lost heavily in the casino and force to borrow a large sum of money from Ah Long. When he was unable to pay Ah Long; he was then forced to sell his flat to Ah Long at depressed price to pay up his debts. Do we bang our head against the wall when we heard that evaluation of a flat in our block was that low? No, right?

If our neighbour B sold his flat to a young couple who wanted to live near their parents and willing to pay high price and high COV of $40K. Do we jump up and put up our flat for sale too? No, right?

So what is market value of our investment?

We have a choice on how we perceive the value of our investment and especially for those volatile stocks:

1. Mark to market value on daily basis and follow the craziness of the market up and down with the daily emotional swings.
2. Mark to initial investment cost and ignore how the market perceive the value of our investment. But, we have to be very careful not to over-state the value of our investment and avoid self-denial of real losses.  So it is wiser to grossly under-state the value of our investment as capital protection strategy.

Re-making the current Portfolio since 2001

The stock market tends to be more volatile than the property market; but it doesn't mean I should be as crazy as the stock market and take the emotional roller-coaster ride by marking all my investment to the market value on daily basis. I realize that I don't need to do it?

I will split my current portfolio into two distinct portfolio - investment and speculative. Each portfolio will have its own purpose and will be tracked and measured differently and independently. In the past, when I look at my portfolio, I always feel that I am winning the investing game with big margin and tend to be complacent and lack of corrective actions.

Two distinct Investment and Speculative Portfolio

All stocks will be classified as speculative until they are proven to be capital protected and yield at least 6% in cash flow before transferring them to Investment Portfolio.

For investment portfolio, I will focus on sustainable cash flow and indicate the stock value to their initial investment costs and disregard any market value. These investment stocks will be growth-dividend stock with high margin of safety to their initial investment cost so that they can withstand market crashes as capital protection.

For speculative portfolio, it will be fixed capital at risks for speculating future growth-dividend stocks and hopefully over time I will be able to find more growth-dividend stocks to generate more cash flow in the investment portfolio.


Conclusion

In this way, I will have a smaller speculative portfolio to ride with the craziness of market cycles while maintaining sanity with a bigger, stable and capital protected investment portfolio. Sleep well at night even when market is wild and mad.

Read? Pillow Stocks Strategy (2)

I am practising 3M's in Investing and Trading - Method, Mind and Money management.

Now, the speculating mind will be just tracking and measuring the performance of the speculative portfolio and not confused by the past winning multi-baggers that are deceiving the speculative mind over its real performance.