My investment strategy

After NBCi bought flyswat, I knew nothing about investments. I used a private banker from Morgan Stanley to help me figure out what to do. He basically didn't help at all and sort of blew me up instead. So when I left NBCi, I vowed to become a better investor. I took the CFA exams, read the Motley Fool constantly, and even started an investment club at Chicago's law school. I've made some good investments - Blue Nile (NILE) at 26, Garmin (GRMN) at 14 - and some bad ones - JetBlue (JBLU) at 20, but overall, I've beaten the indices with low risk.

I have a few rules I follow, and the more disciplined I am about them, the better my returns seem to be:

1. Good portfolio allocation. About 25% in international markets, 10% in bonds or cash, 40% in indices, and the rest in individual small caps that I choose. Asset allocation has a bigger impact on the overall risk than individual selections.

2. I plan for a very long holding period when I purchase an individual stock. I don't have much time to spend investing, so I need to buy things that I can leave alone for a couple of years. I might miss a few good trading opportunities by not re-analyzing every quarter, but I'll do worse if I buy stuff intending to constantly adjust and then don't have the time to do it. Now that I'm out of WebTrends, I'll spend a couple of weeks rebalancing entirely for the first time in something like 5 years. (I've made a few transactions in that time, but I haven't done a complete review).

3. I don't invest in software or internet stocks. Because I work as an entrepreneur and end up with concentrated holdings in private companies in those industries, I try to divesify by buying other stuff when I trade. For me, this rules out companies like Google and Yahoo - even though lots of people have made lots of money trading those, it doesn't make too much sense for me. It would be betting more than investing.

4. When I buy an individual stock, I'm usually a value-based, small cap investor. I prefer to aim for companies in the $200-500M EV range that are growing but trading at reasonable multiples. I don't buy anything without reading at least a year of public filings and looking at how their metrics (revenue growth, margins, cash conversion cycle, free cash flow, etc) have changed over the last few years.

5. Most of the time, I only sell if one position has become too large because of a rise in price (about to sell portions of both Garmin and Blue Nile for this reason). (I know that I'm very weak at selling stocks that are down. This is a common investor bias and one that I'm consciously trying to minimize.)

I'm writing this up today because I recently joined Cake Financial (as a member, not as an employee) and another member asked me why I hold EWY (an index covering South Korea). Sadly, I have no specific reason. It just goes back to my first rule on portfolio allocation - I needed some international exposure, I had some in other countries already, so I bought a set amount in South Korea. I don't have any reason to believe that I can successfully identify particular international stocks or even particular regions, so I just stay focused on exposure to internationally divesified indices.

Cake Financial has built a very cool social investing site where you can follow the trades and performance of your friends or of people who invest like you. (My username is jrodkin if you want to follow me.) The site is early stage, so it still has a few bugs - it can't get E*Trade transactions for more than two years back, for instance - and the bugs make it misstate some past performance, but they'll get those worked out. The team seems very dedicated to solving the problems and building a great investment community, so I'm sure the minor bugs will get worked out quickly. I have more detailed thoughts on Cake (with some feature requests) that I'm working to write down in the next week or so.

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