80-20 Investing – the Portfolio
Posted on | March 25, 2010 | No Comments
I have decided to set up another real money portfolio to test out my ideas of 80-20 Investing, which I have previously discussed. For 20% of the effort I believe it is possible to get 80% of the investing result.
The idea is fairly simple.
Set up some investing criteria, and when a stock passes the rules you buy it. You also create criteria for selling. Such as when the stock reaches a certain percentage gain you sell it. Obviously, you also need rules for selling after a certain period of time if your stock does not appreciate. if you do not have a gain you sell after specified period of time you sell. Also, if you find a better value proposition I may need to sell a stock before I would otherwise sell it. I will attempt to keep this a mechanistic portfolio, that is to remove my opinions, gut instincts, the emotion, from the process, as much as is possible. I will not do a lot of analysis. In many ways this will be like holding a Magic Formula Portfolio except that I will definitely have some element of asset value element in the criteria. This will be separate from the Small investor portfolio, and will start with more money, initially say $5000. This should allow me to hold 10 positions of approximately $500 each.
This will be a true experiment in the sense that I cannot forecast the outcome. There seems to be contradictory research out there that suggests that value investing is superior to growth investing, but also that human’s are certain psychological limitations that may limit us from truly maximizing returns, even if we know we are engaging in the limiting behavior. Thus the 80-20 investing Portfolio is an attempt to remove as many of my own limitations from the process as possible.
The biggest hurdle to this kind of investing is devising the system with which to follow. I have almost finished the development stage for the criteria I will use for buy and sell signals. They will of course be value oriented and research driven. I will lay the criteria out in a separate post, that should be lengthy so I can refer to the research supporting the theory of investment criteria. If you have any thoughts on this subject I would love to hear them.
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Tags: 80-20 Investing > Investing Strategies
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