How to Build a Bad Portfolio

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A bad portfolio is a lot like a good portfolio in that it starts with the best intentions. We're all trying to make our money work hard for us, and we all have good and bad times. I think we can all agree that 2008 was a pretty bad time, and since then we've had generally better days. But "the market" doesn't rule your portfolio -- you do. I've made some stupid mistakes over the years, and I'd like to share with you what I've learned so you can do better from the start. So here's how to do your portfolio wrong.

Don't Do Research

What could possibly go wrong when you select a company based on a hot tip or going after a trend? A lot, actually. For example, when I first bought into TeeKay Tankers (NYSE: TNK), I didn't realize that its lack of skill in managing its fleet and contracts would prove disastrous to its bottom line. If I'd gone into reading with more depth, I would've noticed how many problems the company has. I think the business model still has validity and the dividend is still being paid, so I'm hanging in there. But am I embarrassed and considering chucking it? You betcha.

Ignore Branding

I love a company with a solid moat, especially when it's doing something I really respect. Unfortunately, this respect doesn't always translate into performance. When I bought into Female Health (NASDAQ: FHCO), I hadn't considered that having a strong brand is crucial to performing well. The problem with operating in numerous countries and marketing your products primarily to government agencies is that you have to deal with bureaucracy, not motivated consumers. With very little branding behind it, having the only FDA-approved female condom is far less valuable than it could be, and Female Health is doing "okay" as a result.

Be a Generic Contrarian

I chose to buy into REITs with a lot of companies that are no longer around, but when I bought into RAIT Financial Trust (NYSE: RAS) I assumed that most any play into this arena would do reasonably well. I liked the balance sheet, the debt levels seemed reasonable, and the business model was strong. Unfortunately, I didn't take into account management's decision-making process or the fact that sometimes the industry is just getting crushed. I bought in right before the commercial real estate decline started. Oops.

Make Snap Judgments

When I bought into Life Partners Holdings (NASDAQ: LPHI), I looked at the dividend and was hitting the "buy" button without doing any substantial reading. This was a mistake, as I hadn't realized I was buying into the "cash out your life insurance" business. With increasingly long life spans, surprisingly unpredictable payout times and large cash outflows as a regular part of doing business, the company has barely turned a profit since I've owned it. I should've hit the "avoid" button.

What We've Covered

Basically, this entire article is just a lament that I didn't do enough research, I made snap judgments and I thought that buying any kind of contrarian position would be a great idea. Beyond those really grievous errors, I completely ignored the fact that perception is reality, and if you're not perceived you're not really playing the game. Don't make these mistakes, and your portfolio is likely to do better than mine has over the past few years.

pongun has positions in every stock mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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