As we start 2017 and leave 2016 behind, I thought now would be the right time to share something I learnt a little under nine years ago. I believe the lesson I gained that day is as relevant today as it was for me back then. That fateful day was 3 April 2008. The Straits Times Index (SGX: ^STI) was already down 18% from its high in late 2007 at that time. Back then, I had about three years of investing experience under my belt. But nothing in those three years had prepared me for what was happening in front of my…
As we start 2017 and leave 2016 behind, I thought now would be the right time to share something I learnt a little under nine years ago. I believe the lesson I gained that day is as relevant today as it was for me back then.
That fateful day was 3 April 2008.
The Straits Times Index (SGX: ^STI) was already down 18% from its high in late 2007 at that time. Back then, I had about three years of investing experience under my belt. But nothing in those three years had prepared me for what was happening in front of my eyes. From a peak of 3,906 points in mid-October 2007, the Straits Times Index fell by a gut-wrenching total of 63% when it eventually bottomed out at 1,455 points in early March 2009.
As an investor experiencing such a stomach-churning drop for the first time, it was a harrowing experience. My portfolio was a mess of stocks and I didn’t quite know what to do.
Enter the opportunity to start afresh
It was on that fateful day of 3 April 2008 when I chanced upon an interesting idea from hedge fund manager Michael Steinhardt. Years later, I learnt that I was not the only Fool in Singapore who had found Steinhardt’s idea to be useful.
Here’s how my colleague David Kuo described Steinhardt’s most interesting investing move in an article he wrote in 2013:
“Steinhardt was a prolific investor but he admitted to occasionally starting his portfolio all over again from scratch.
At the drop of a hat, Steinhardt would sometimes liquidate all his positions. So in an instant, he would have a bag of cash and a clean slate to work with. Steinhardt said it felt stimulating to rebuild a portfolio from scratch – liberated from what he called wishy-washy legacy holdings.”
I am not suggesting that you liquidate your entire stock portfolio with the start of a new year. But I do think Steinhardt’s approach can be an interesting thought experiment for our own portfolios.
Here’re three simple steps we can take in our heads:
- Imagine if someone had liquidated your entire stock portfolio yesterday night. So all you have today in your portfolio is cash.
- With an all-cash position now, list down the stocks that you would buy. Also, note down how much you would buy for each company.
- Now this is the crucial move – compare what you wrote down in (2) with what you actually have in your portfolio now.
If your list of stocks and the allocation for each stock in step (2) turns out to be wildly different from what you have in your current portfolio, you might want to look into reasons why you had allocated your money the way you did up till now.
Some pertinent questions might be:
- Have you been holding on to a business that is permanently damaged?
- Were you attracted by lower stock prices instead of fundamental business performances?
- Are you under-allocated for a business that is doing well and that you have a high conviction on? If so, why?
Behind the answers for the questions above might be big lessons or discoveries about yourself and your own investing-tendencies. I have found Steinhardt’s idea to be one of the most liberating investing thoughts I have come across so far. In an instant, it can clarify the mistakes that I have made and the soft spots in my portfolio.
We’re only in the first few days of 2017, so it can be said that all of us are starting afresh for the new year. Just like it did almost nine years ago, I hope that finding the reasons for the questions above might lead you to the same epiphanies that I experienced and help you invest better for 2017 and beyond.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.