2009 Investing Mea Culpas

With 2010 underway, its important to look back at the year gone by to assess — what was done correctly can take care of its self, but the areas that need improvement require active intervention.

All told, 2009 was a year rife with both risk and opportunity. If you avoided the risk and took advantage of the opportunity, then congratulations are in order. But even those who crushed it this year always have some room to improve.

Assessing our own performance in 2009, I am pleased with our asset allocation, macro market calls and stock selection. Coming into 2009, we were appropriately Bearish; when the indicators told us to reverse course, we did so without hesitation. And when the overall markets continued powering higher without giving any major sell signals, we stayed the course.

But there were areas that I would like to see improvement in. Translating market calls into investment decisions is always the challenge. Getting the big picture right is only half the battle; there is always room to refine your approach and improve the investment decision-making process.

Here are 5 asset management choices I made that I would like to see improved in 2010:

• Not Aggressive Enough: I actually discussed buying (for my own account) both in-the-money and out-of-the-money SPX calls when we were making the March buy decision. Between editing the book, dealing with clients, and general market madness, I lost track of the idea amongst the mayhem. That neglect left a lot of money on the table.

Possible solution: Pull aside a small portion of one’s assets — 5 -10% — for aggressive trading ideas, including options. Being right should provide big upside; being wrong should have only a minor impact on total net worth assets; In other words, you shouldn’t lose sleep over this account;

• Improving the Sell Discipline: Some of the decisions that were made over the year look (in hindsight) to be too quick. The discipline of selling stocks that have had a great run can be refined further. Its one thing to sell a least favored stock to rotate into a more desirable position; its another thing entirely to guess that a stock has gone too far without additional corroborating data. Some positions (purchased down 90%) were sold after gaining 100%, only to see the names triple.

Possible solution: Using trailing stop losses to stay in strong names longer;

• Too Much Cash: Despite making the right call in early March, we legged in slowly. I am not suggesting that you go all in on a single day or week, but the process of going from 80% cash to fully invested took longer than it should have. Directly related to the two points above, when the market is rallying aggressively, we need to carry less cash sooner and more exposure more quickly;

Possible solution: Have the courage of your convictions; better to own positions with tight stops than to only own half positions;

• Undue Influence: Its always a balancing act when dealing with clients. On the one hand, you cannot blow them off when they bring you concerns (its their money!). On the other hand, you cannot allow the investing public’s group mentaliity (or panic) to infect you.  We took a lot of heat for several calls that turned out to be correct, but in a few cases, took steps at the request of clients that lowered overall performance;

Possible solution: Improve regular communication with all clients; Work on making sure they understand the process, our current thoughts, and where we are so as to avoid the 2nd guessing.  Preempt the “My way or the highway” conversation proactiviely;

• Focus!: We all have many items calling out for our attention; but having too much on your plate means things fall through the cracks (like that option trade!). Our modern short attention span society has the appearance of being more productive, but probably isn’t. Free association is great for creative brainstorming sessions, but winging it during execution means stuff is going to  slide.

Possible solution: The checklist! When I stick to my TTD, I can be wonderfully productive. Must stay with that in 2010.

These are only a few of the factors that I want to improve upon in 2010; Trust me when I tell you my list gets longer every year.

Ideas, suggestions, and hints for improving are always welcome!