Having your cake and eating it too

I got the following email from a subscriber and it underscores an important mistake that both professional and retail investors make:

Hi Cody. I subscribe to yours service and think it is great…overall I think you have great insight and enjoy your recommendations.

One of the things I really enjoy about it is your Contrarian views and suggestions! I am confused about one thing though, and correct me if I misunderstood. A few weeks ago you suggested that we sell some of our Apple stock, as you felt it would drop after the debut of the iPhone5. I sold some of my stock and now I see how Apple has gone up quite a bit since the new iPhone came out. Did I miss something, do something wrong?

Thanks and keep up the great work! Cody 2012!

Warm regards,

S.

First of all, thanks for the kind words, S. To answer your question, no, you did not do anything wrong at all on that trade.

You see, you’re never going to catch every top and every bottom. You’ll often hear the debate over “buy and hold” or “trade frequently”, but as most debates are, that one is oversimplified. Let’s review the strategy we’ve been employing so successfully for the last few years in this newsletter since the markets bottomed in 2008 — stocks, especially Apple and Google, I’ve said are headed for a stock market bubble, and thusly we add to those positions on weakness and trim when they run. That strategy, I guess, is actually a “buy and hold and trade frequently” strategy that works very well given that we were very early in getting ahead of the huge rally stocks like Apple have had.

Apple’s been my biggest position for many years and I can’t tell you how many times I’ve trimmed that stock down to lock in some profits only to see it continue to power higher. And I can’t tell you how many times I’ve added to my core position when the stock has been down, only to see it continue to drop for weeks or even months at time.

I once wrote an article for the Financial Times called, “Managing money is for idiots” and that includes those of us who manage our own money. Why? Because this is the way it works:

If your portfolio’s performance at any given time fails to beat the market and/or you lose money in the stock market, you truly feel like an idiot.

If your portfolio’s performance at any given time matches the market and/or lose money in the market, you feel like an idiot, because how can you not do better than that?

And if you blow away the markets and nail the trades like S just did in Apple by buying low, trimming high so you make big money, well you still feel like an idiot and wonder what you did wrong because your brain knows that you could have made EVEN MORE money if you’d just done everything exactly right at the exact right moment. And guess what, there will always be ways you could have nailed that trade even better.

By adding on weakness and trimming on strength, you’re having your cake and eating it too. You’re making more money than you would have in an buy and hold approach and you’re also reducing your overall risk by keeping flexible as stocks move over the long run.