XMFHamp (99.85)

I'm Number One in StockTrak

September 19, 2007 – Comments (4)

Ok, so my CAPS score is lousy at 30. But CAPS forces you to pick a large number of stocks in order to have a chance at winning, whereas in a real portfolio the only number that counts is your profit and loss. I am a portfolio guy, not a stock rating guy. My goal is to make money. Isn't yours?  I read a book in business school called "The Goal" by Eliyahu Goldratt. It was about an assembly line factory where the boss thought that the goal was that all sections of the line have to be operational continuously (i.e., no "down time). But this philosophy led to poor profitability. This begged the question: what is the goal of the assembly line? Is it to make sure that no assembly line workers rest or slack off during the day? No! The goal is to MAKE MONEY. I turns out that the most profitable way to run an assembly line is to remove bottlenecks that slow down the entire process. Forcing non-bottleneck sections to produce continuously is actually anti-productive because it causes goods to build up and crowd the floor, which later will take time to clear, slowing production down.

I think this lesson can be applied to investing. The goal is not maximizing the number of stocks you can think of that outperform the market by even an infinitesimal amount. The goal is making money, which could include very few investment ideas. Peter Lynch coined the term "diworsify" which means that a company expands beyond its core competency into businessess that provide only mediocre and low returns. Similarly, Warren Buffett argues that investors should not diworsify their investment portfolios with a large number of mediocre stocks. If you can find a few "inevitables," which are top-knotch stocks with competitive advantages and great management, you should focus your portfolio on these alone. Do NOT rebalance your portfolio by selling a portion of these great stocks to make way for mediocre ones.

All of this introduction segues into my reason for liking StockTrak over CAPS. StockTrak is a portfolio simulation game, which measures you on profit and loss, not only the number of stocks you pick. We Fools in editorial are participating in StockTrak internally at Fool HQ. I am Number 1 in StockTrak with a 30%-plus return in less than three months. My portfolio is concentrated in a few select options positions. I think I will start posting some of my trades here on my CAPS blog. I knew CAPS was good for something! :-)