How did you do in 2005?
By the numbers, my portfolio had a good year. My picks were up 33% for 2005 vs. a 0% return for the
Dow Jones Industrial Average
and 4% for the
But numbers aren't the only way to measure a portfolio's performance.
The other ways to measure performance are far more squishy and subjective, but I think they're just as important for anyone who wants to make a consistent profit -- in good years and bad years -- in the stock market.
They're so important because scoring well on these subjective measures keeps a portfolio on course over the long term and prevents a good year or two (or a bad year, for that matter) from leading a portfolio into dangerous territory.
Here are the other ways that I measure my performance.
Don't Fight the Market
Did I take what the market gave me or did I try to force profits?
Those of you who like sports analogies should find this very clear. A good offense in basketball doesn't keep forcing the ball into the hands of the center when the defense has collapsed on that player. It takes what the other team is giving it and shoots the uncontested three-pointer from the perimeter. Same in football: Instead of throwing an interception deep into double-coverage, the quarterback picks apart the opposition with short passes. In baseball, the smart batter doesn't try to pull every pitch but often goes to the opposite field.
It works the same way in the stock market. What do you do if you feel that technology stocks must go up but market trends are telling you that the technology sector is dead money and that energy is where the action is? All investors have a tendency to favor what we know -- to put our next buy order in on the sectors that have rewarded us in the past and that we know better than others. But not all sectors work in all markets. That was certainly the case in 2005, when the energy and utility sectors were far more rewarding over the stretch of the entire year than, say, technology.