Simple Truths of Portfolio Strategy

There isn't a single portfolio strategy that is superior to all others. Great investors like Michael Price (special situations and restructurings), Peter Lynch (growth) and Marty Whitman (value) each have employed different strategies in building impressive, market-beating, long-term records.

While there is no single methodology that every investor should embrace, there are some basic investing principles that you can use to build your portfolio.

Stocks Are Assets

Ignoring the fundamental fact that stocks are assets is the main reason investors are notorious for selling low and buying high. Investors do not treat their stock holdings in the same way they treat other valuable property. Instead, many view stocks as speculative pieces of paper, meant to be traded in the casino known as the stock market.

Investors turn to nonsensical portfolio strategies that result in irrational behavior, such as buying stock after and because the price has increased, or selling stock after and because the price has declined. Owners of other types of assets don't engage in this irrationality. An owner of a $100,000 home, for example, isn't going to sell his or her asset because offers decline from $95,000 to $85,000 from one week to the next. But selling because of a declining bid is endemic to the stock market.

You can't get any more basic than this: A stock represents an ownership interest in a business entity, a legally enforceable claim on the net assets of that corporation. It follows, then, that the central preoccupation of an investor should be putting a value on this asset known as stock.

Value vs. Price

Knowing and understanding the value of a stock is of paramount importance. This is what great investors think about: What is the cost (price of the stock) and what is it worth (the value of the business)? Answering this simple question makes buy and sell decisions easy. And it cuts emotions and other irrational influences out of the equation.