Even a Shark Has to Adapt

With the new year upon us, it is time once again to reflect on the lessons we have learned this past year. If you invest in the market, the one great certainty is that you will be far short of perfect. It is the nature of the game.

We will only make the perfect entries and exits by luck, and no matter how good we are, there are going to be times when our luck runs bad. We can always find ways to improve, and the only real mistake that we make is the mistake from which we learn nothing.

2006 presented some particularly dramatic changes for me. I changed my focus from primarily managing just my own funds to managing funds for others. There has definitely been a learning curve as I find the style that works best for a large increase in capital. Trading styles are generally not scalable. You can't just continue to do what you have always done on a bigger scale if your capital grows substantially. You need to change time frames and even the vehicles that you trade.

Managing a small personal portfolio is very different from managing a fund, and most people don't fully realize that. The average investor often thinks he should approach the market in the exact same way as a giant mutual fund, and as a result he ends up squandering the many advantages that he has. For me, the opposite was the case. I had to adapt my Shark style and become more Whale-like. It has been a challenge, but I'm quite pleased with the progress I've made.

One of the more surprising lessons I learned about managing a fund is that consistency of returns is far more important than big returns. Investors do not tolerate swings. A fund that produces steady returns of 10% will likely attract more investors than one that produces erratic returns of 15%. As a result, diversification and risk-management are even more important in fund management. You can't risk the big drawdowns, and it can be much harder to recoup losses when you are dealing with larger sums of money and are not holding highly concentrated positions.

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James "Rev Shark" DePorre is the founder and CEO of Shark Asset Management, an SEC-registered investment advisory firm. He also operates sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children.Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here to send him an email.