BI > AUGUST 2003

Couching Tigers, Bidding Dragons

The Virtues of Do-It-Yourself Investing, Together

The challenge of portfolio management. According to investing author Mary Rowland, this challenge ranks as the leading inhibitor to investors thinking about pursuing personal responsibility for their investment results. Some write of slaying portfolio management dragons. Perhaps it's time to rethink our notions about these dragons.

Dragons possess qualities of intelligence, wisdom and magic. Most dragons are good and are actually protectors of man. This seems very similar to the words we recently shared about misperceptions regarding man's best friend and the dogs within our portfolios. We want dogs (i.e. best friends) in our portfolios. Slay those dragons? I think not. My portfolios can always stand a little more intelligence, wisdom and magic.

In Mary Rowland's MSN Money feature "Is Do-It-Yourself Investing Right For You?" she notes that investing on one's own can be very cost-effective. Most people are intrigued by investing and are willing to learn more. In her view, there are five advantages and five challenges to investing on your own.

The Five Challenges -- Tigers of Terror?

1. You don't know how to design a portfolio.
2. You are emotional about your investments.
3. You don't have time.
4. You lack discipline.
5. You lack staying power.

The Five Advantages -- Dragons of Opportunity

1. You can save a lot of money.
2. You can achieve superior performance.
3. Investing can be satisfying.
4. You can manage and control taxes better.
5. Potential performance is higher.

Investment Club Dragons

The challenges are real. Conquering them requires some courage and commitment. Investment clubs and strategic long-term investing can and do provide substantial support.

In the 1996 movie "Dragonheart," the story revolves around a noble knight beholden to an "Old Code" and an animated dragon (Draco) featuring the thick Scottish brogue of one Sean Connery. As the movie starts, the knight is on a quest to slay all the dragons until Connery convinces him that he'll be out of a job when he slays the last living dragon. Dennis Quaid's noble knight and this sole surviving dragon proceed to form a business relationship so that they both may prosper. NAIC investors follow our own version of an Old Code. Our principles of investing provide a healthy dose of discipline, selectivity and an answer to portfolio management challenges.

Discipline? Invest regularly. Investment clubs provide a monthly regimen. Too much time? Most clubs meet monthly for an hour or so. Some investors will spend a couple of hours per month preparing for the meeting. NAIC practitioners discover -- with some experience -- that quarterly stock analysis updates on their holdings and watch list consume fairly little time.

Too emotional? NAIC stock analysis leads to an understanding and assessment of any investment holding or opportunity in two key ways: Is the holding (or purchase candidate) a quality investment? Do your expectations for growth, profitability and valuation suggest sufficient expected returns going forward?

Developing and maintaining this basic understanding for every holding in a portfolio can result in effective portfolio design. Design your portfolios to be of high overall quality with suitable return expectations. How many stocks are enough? Aim for 12 to 20 and distribute them across a number of industry groups. As investment guru Philip Fisher suggests, own no more stocks than you can effectively follow.

Most investment clubs achieve low expense ratios. Relatively low turnover results in lower transaction costs and better control of taxes. Some use direct investing and dividend reinvestment to dramatically reduce operating expenses.

Investment clubs can also incubate staying power. NAIC has many clubs with decades of experience. We know that, much like most new business ventures, a club that couches the tigers and heeds the dragons for a couple of years will have a long life expectancy.

The best clubs use portfolio design to practice staying power in moderation, too. According to Quaid's noble knight, "Dreams die hard and you hold them in your hand long after they have turned to dust." Be willing to sell a stock to maintain the quality and expected returns for your portfolios. Invite a dragon to your next club or study session. Puff a little magic.

Mark Robertson is director of online resources and senior contributing editor for BetterInvesting. He serves as a member of BetterInvesting Magazine's Editorial Advisory & Securities Review Committee. Mark can be reached at Robertson_Mark@comcast.net.