April in Review and Thoughts on Portfolio Management

Two weeks ago I made an adjustment to the grips on my mountain bike. Rolled them forward a little bit. I had been feeling a little numb on the downhills and rumor was this would create the proper alignment, lessening pressure on my wrist and, basically, making those long downhill rides that much more enjoyable.

Man, was this ever a mistake. The new positioning put too much pressure on my forearm, causing me to have elbow issues. This then translated over to tennis and Wham! I now have tennis elbow.

The point of all this is that there’s a natural tendency to make adjustments when there’s discomfort. However, one shouldn’t mistake discomfort for a problem. My grips were fine…I just ride fast down bumpy trails and it’s natural that my wrists feel the brunt of this. By reacting to the pressure, instead of just accepting it as natural, I took a minor issue and greatly exacerbated it. Physically, in April I took discomfort and turned it into pain.

The same can be said about portfolio management. This is not the easiest time to be a microcap stock investor. The market is trendless, volatility has increased, and many stocks are trading well off their highs. Basically, investing has gone from euphoric in early January to discomfortable in April. However, does this mean it’s time to change your investments away from microcaps? Hardly.

The reason Tailwinds continually emphasizes a portfolio approach is being too wrong in one stock. We’ll always get some wrong, but, by diversifying, hopefully not too wrong to recover. The side benefit of this approach is that, by having enough balls in the air, we can expect to have some decent winners going at any given point in time.

April is a classic example of this where we had 5 stocks down in double digits. Ouch, right? Not so fast. The overall performance of Tailwinds wasn’t disastrous at only down 3%, which is perfectly acceptable in light of the outperformance that preceded April, and the inherent volatility in our micro-cap companies.

Here’s how the companies under coverage fared in April overall…

Unlike my bike grips that were altered on a rumor Wild Bill told me over post-ride beers at the Gestalt Haus, we’re not about to make wholesale changes to the Tailwinds Select Portfolio based on some near term weakness. Rather, we accept the fact that there will be weakness at times and will use this to our advantage to pick up cheaper shares.

But, most importantly, if nothing has changed besides the share price, we will not exit names on concerns generate from share price weakness. Rather, we will add to the positions whenever possible, and exit only when we feel fundamentals warrant a change. This is why, when we sold TTOO and VUZI in March, we moved the money into RESN, AQMS, SGBX and CDXC. Basically, out of stocks we wanted to sell and adding to some long term favorites on weakness, with prices well off their year highs.

Far too often I hear of investors selling simply because the price is down. Now, sometimes you are indeed missing something and it always pays to perform as much due diligence as possible. But, when the answer comes back that the only thing that has changed is the share price, that’s the definition of a buying opportunity; don’t let a little discomfort turn into a lot of pain by selling on the lows.

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