Don't Tinker!

Take a good stock-picking strategy and tweak it a bit to make it better — many investors do just that, and it sounds like a good idea, right? Nope, writes Validea’s John Reese in a piece for Canada’s Globe and Mail.

Reese says that some investors will try to add or subtract variables from a good strategy, which creates an altogether new strategy that has not been tested. Others will use a strategy as-is, but then veto some of its picks, usually because of some negative news about the stock. “Such decisions may seem logical,” Reese says. “The problem is that if a particular negative story is catching your eye, the rest of the investing world probably sees it as well, meaning that the risk is already baked into the stock’s price. In fact, the price probably includes an exaggerated sense of the risk, given how humans are prone to overreaction.”

Reese talks about how tinkering can make you lose out on some big winners and hurt your portfolio over the long haul. He says it’s critical to stick with a good strategy, even when it might be keying on names that make you cringe. He looks at a trio of stocks that he says made him cringe, but which he bought anyway because of his belief in his strategies. Among them: Bed, Bath & Beyond (BBBY), which was upgraded by his strategies today.