Dance With The One Who Brung Ya? You got to dance with the one that brought you Stay with the one that wants you The one who's gonna love you when all of the others go home... Dance with the one that brought you and you can't go wrong
"Dance with the one that brought you" by Shania Twain
There's something to be said for loyalty. When you go to a dance, common courtesy dictates that you don't abandon your date to dance with others. Shania sang about this in her 1993 song. Legendary Texas football coach Darrell Royal frequently said "you dance with the one who brung ya" when asked about his strategy for college football games, meaning use the players and plays that had been successful in prior wins. Can past success be applied to the investment game? Yes. And no. Depends. Some investors ride their winners for years. But long-term winners are few and far between in the stock market. Today's Facebook or Twitter can be tomorrow's Pets.com, Lycos or WebVan. Don't remember these flame outs from the late 1990's dot-com bubble? Neither does anyone else. They've gone bye-bye. A systematic approach that rides winners as long as the odds seem favorable might work better. So, it depends. Price, which often determines the "odds of success", can be the critical factor. At least that's our belief. Pay too much and end up on the losing end. I thought about this as we recently reviewed the 10 largest holdings in our Concentrated All-Cap Equity composite as of September 30. We took a look at how these stocks have performed over the past 5 years, since the onset of the financial crisis in late 2008. Our holdings today bear little resemblance to the stocks we owned back then. Why? As the market has moved higher, we've sold many of our "winners", and reinvested in laggards. Ok, some people might call them losers. Stocks that haven't done much lately. Of the current top ten, five have had negative returns over the past five years. Collectively this group is about even while the S&P 500 is up about 10% per year over the past 5 years.
Why do that? We like to think it's as simple as "Buy low, sell high." Time will tell if we're right. It can be psychologically hard to do this. Sell the successful ideas and plow the proceeds into stocks going nowhere lately. But it's all part of the process.
What, a process? Yes, a process. Invest at a significant discount to assessed value and hold as long as the gap between price and value remains wide. When the gap closes, sell and move on to where more perceived value is available. Simple process. But hard to implement. Because as humans we are often biased to favor winners, especially recent winners.
So while Shania might be right about the dance floor, and Coach Royal had the right strategy for football, when it comes to investing, it's better to analyze your common stocks with a dispassionate eye and know when it's time to part company. Unlike your dance partner, the stock market won't be offended.
-John Heldman, CFA | 
