Use the market sell-off to upgrade the quality of your ASX share portfolio, writes The Motley Fool.
"It's a long way to the top, if you want to rock and roll…." AC/DC
Investing requires practice
There is no rocket science about investing. It is just like any other field of endeavour, such as sports, music or business. To reach the top in any field requires a combination of hard work, talent and luck. You cannot control the talent or the luck, but you can control the amount of hard work you put in. Without the hard work, no amount of talent or luck will take you to the top.
Even so, the vast majority of participants in any field of endeavour do not start out with an ambition to reach the top. In fact, most people engage in a field of activity because of passion or recreation. They practice in order to get better, and given enough time and practice, a reasonable standard is usually achieved.
Good is often good enough
Investing is no different. It is simple but not easy. It can be mastered by deliberate practice. The best of all is that you do not need to be the best to achieve decent returns.
The process involved in investing does not guarantee outcomes. An investor cannot control the outcome of an investment idea. But an investor can control the investment process. More often than not, a sound investment process is sufficient to generate good, maybe even excellent, results.
Stick to the Process in Good Times and Bad
The key is to be consistent and to stick to the process. Do that, and you'll go a long way toward finding the best investment opportunities.
As an investor, it is your job to allocate your capital to its best use. Every dollar should be invested in the best possible opportunity, with sensible portfolio diversification.
The Motley Fool has already repeatedly stated that one of keys to investing success is to buy good companies when they are trading cheaply, generally holding them for the long-term.
Share prices swing up and down on a daily basis. Company values move in a much more measured way. In these particularly volatile times, people are tempted to sell shares just because the share price has fallen. The folly of such decision making should be obvious.
Swap to higher quality at cheaper prices
That said, investors should be alert to selling opportunities. In markets like these, when the share prices of all companies seem to be falling in unison, you may have the opportunity to sell cheap mediocre companies in order to buy cheap quality companies.
If you are currently gritting your teeth, gumming up and switching off your computer screen in the face of this bear market, you are really not taking advantage of the opportunities available.
Over the last decade, I have heard many investors lament that they have fully committed all cash to shares, and they are not able to take advantage of bargains involved. Instead of lamenting the lack of available cash, instead they could look to their own holdings and use the opportunity to upgrade the quality of their portfolio.
Ditch the stubborn turnarounds
Have you looked at your portfolio recently? Are you holding that stubborn turnaround that has failed to turn? Structural Systems Limited (ASX: STS) has been plagued with "unexpected" problems for the last few years. It looks cheap at a P/E of 6, but could get cheaper if more problems arise.
On the other hand, consider the performance of Forge Group Limited (ASX: FGE), seemingly more expensive at a P/E of 9, but with considerably brighter future prospects due to quality businesses, good management and excellent past performance.
As Buffett stated as far back as 1979 in his letter to shareholders:
"Both our operating and investment experience cause us to conclude that "turnarounds" seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price."
Dump the promise peddlers
Are you still holding those pharmaceutical/technology/exploration companies with lots of promise but has yet to make a decent profit? Biota Holdings Limited (ASX: BTA), Mesoblast Limited (ASX: MSB) and Ceramic Fuel Cells Limited (ASX: CFU) may have exciting, even hugely profitable, futures, but you are paying a price for this excitement.
Trade up to better quality
Have you considered selling Qantas Airways Limited (ASX: QAN) trading at a P/E of 10, and using the money to buy Flight Centre Limited (ASX: FLT) trading at P/E of 9? How about trading in Myer Holdings Limited (ASX: MYR) for JB Hi-Fi Limited (ASX: JBH)?
The current market not only provides good opportunities to pick up quality shares at a good price, it is also a good opportunity to get rid of mediocre shares and purchase quality shares.
Charlie Munger's sage words bear repeating, and I paraphrase with a slight twist…
In the long term, you will make more money from a quality business purchased at a sensible price, rather than holding on to a mediocre business trading at a cheap price.
Just remember that you do not need every share in your portfolio to do well in order to make money. In an investing lifetime, all you need is a few good ideas, and the conviction to back up your good ideas.
Foolish bottom line
Whether you are aiming to buy small cap growth stocks, high dividend yielders, or high quality businesses, it is important to maintain consistency in the process of research and portfolio management, to ensure that every dollar of capital is invested in the best possible opportunity at all times. Keep at it, and who knows, perhaps one day, you will reach the top.
Jack Welch, former CEO of General Electric, had a human resource policy of firing the bottom 20% performers every year. Isn't it time to fire your bottom performing shares and hire better performers?
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