Eight Secrets to Improving Your Portfolio Returns

When you look over your stocks, bonds, mutual funds, and other assets, you should get a warm feeling of familiarity. If it is an apartment building, you might remember what you paid, why you bought it, going and checking out the property for the first time, and signing the papers. If you own shares of McDonald’s, Johnson & Johnson, an S&P 500 index fund, or any other countless security, when you glance over your reports, you should know exactly why you own them – how much you expect earnings per share to rise over the next decade, management’s capital allocation policies (dividends vs. share repurchases vs. debt reduction vs. acquisitions, vs. growing organically), as well a legal and economic trends that might affect your position.

That’s why Warren Buffett’s assertion that investors stay within their circle of competence is so incredibly important. You might not be able to value an oil services firm; leave that to someone with competence in that field. Instead, focus on what you do know and how to make money from it. Graham, in one of his many investing books, pointed out the case of an average man who became so intimately familiar with the American Water Works Company, he was able to make his fortune buying and selling only that one security over his lifetime. In investing, breadth of knowledge is worthless; what you want is depth of knowledge.