Five Keys to Improving Your Performance

Many investors who understand how this applies to the downside of a stock investment don't grasp that it applies to the upside as well. You can correctly identify an upward trend in the market, and in a sector, but still pick the wrong stock and miss out on all the profits. The goal is to create a match between the profit opportunity you identify and what you buy to participate in that opportunity.

I did only a fair job on this measure in 2005. Buying one of the strongest railroad stocks, Burlington Northern Santa Fe(BNI Quote), was a smart way to participate in the upward trend in the railroad sector and in transportation stocks in general. But buying Cell Genesys(CEGE Quote) as a way to profit from the upward trend in the biotechnology sector created a huge mismatch between opportunity and risk. The opportunity was sectorwide, but by picking just one small-cap stock, I took on more individual-stock risk.

I compounded the mistake when I kept Cell Genesys and sold off the Biotech HOLDRS (BBH Quote) position that gave me exposure to the entire sector. Today I'm looking at a 25% loss in Cell Genesys. If I'd held on to the Biotech HOLDRS, I'd be showing a 43% profit from that purchase.

Did I stick to a trading strategy that I'm comfortable with? It's tough to stay in your own comfort zone when buying and selling, but I think it's essential. It's tough, because all of us see, from time to time, opportunities to make money that just require an adjustment to our normal investing behavior.

This year, in October, I thought I saw a good opportunity to make money twice by short-term trading. First, after the energy selloff after Sept. 30, I thought adding volatile energy-sector stocks, such as Ultra Petroleum(UPL Quote) and Dril-Quip(DRQ Quote), would result in good short-term trading profits. Second, I thought I could load up on technology stocks, such as Arris Group(ARRS Quote), at the end of October and pick up short-term profits in the year-end rally.