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Leaky Pipes & Under-Performing Stocks

This article outlines the concept of relating leaky pipes to chronic under-performing stocks.

Leaky pipes do their damage over time…

• Small leak doesn’t appear to be a big problem.
• Damage can remain undetected for years.
• Results can be more damaging than a burst pipe.
  • Burst pipe is more immediate.
  • Immediately aware of problem.
  • Water turned off.
  • Damage is limited to a more isolated area.

A leaky pipe similar to a chronic under-performing stock…

• Rarely grab our immediate attention.
• No immediate dramatic dips in performance.
• Just a steady downward trend.
• Potential to do most long-term damage.
  • A burst pipe is similar to a volatile headline grabbing company.
  • Draw immediate attention.
  • Dramatic dip in share price.
  • Quickly dealt with to limit appreciable impact over life of a portfolio.

Importance of recognizing leaky pipes…

• Long-term leaks create damage that is hard to recover.
• Leaky pipes might have been stock market darlings of the past.
• Investors find it difficult jettisoning these former winners.
• Believe the ‘Return to Glory’ days are just around the corner.

However, by continuing to hold these ‘leaky pipes’ …

• Performance leaks out year after year.
• Returns required to catch-up become greater and greater.
• Leaky pipe taking up a place in portfolio that can be replaced by out-performer.
• Opportunity cost lost by not replacing.

How to manage/identify leaky pipes…

• Organize your investment holdings.
• Measure long term performance.
• Monitor fundamental trends.
• Replace leaky pipes with out-performers.
• Watch list for ideas: replacement process to improve long term results.

Summary…

• Investors are too tolerant of leaky pipes.
• Investors need to be actively searching for and eliminating leaky pipes in their portfolios.
• Not doing so, leaky pipes cause underperformance, while also taking place of potential position that could outperform.
• Investment Account Manager provides the tools to identify leaky pipes in your portfolio, and allows you as the manger of your portfolio, to improve the long term performance of your portfolio, while adhering to the guidelines that meet your risk tolerance.

References: Wachovia Securities
Image via Terekhova