Knock Some Sense Into Your Portfolio

 | Mar 12, 2012 | 12:30 PM EDT
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Somehow, I never saw it coming.

I was throwing batting practice to my son's little league team Saturday, from behind a protective screen, and the next thing I knew I was on the ground. A solid line drive smashed into the left side of my forehead and I went down. So much for protective screens. I got up, only to stagger and go right back down. After I realized what had happened and regained my balance, I was ready to throw again. But the other coach stopped me and some of our players were aghast at the huge egg that was forming on my head. It was time to apply some ice before I looked even more like an alien.

I'd like to say that baseball knocked some sense into me, but it's too early to tell. The incident did, however, get me thinking about the markets and my portfolio, and, more specifically, what unexpected events might be lurking therein.

In terms of the markets, we've entered a relatively calm period. Year to date, there have been just five trading days where the S&P 500 has finished plus or minus at least 1%. Last year, there were seven such occurrences by this time, but that pales in comparison to 2008 and 2009 when there were 24 and 28 instances, respectively. While I don't anticipate a return to that level of volatility, I also did not expect to be nailed by a baseball, either. There are still a lot of potential powder kegs, Iran being one, and Europe another. You can't live your investing life in fear, but you should be prepared; in my case, that means having some dry powder on hand.

It also means reviewing your portfolio and asking yourself why you own certain names in it. If you don't have a good answer, or if it's because of an emotional attachment, there's your potential source of dry powder.

In terms of what can go wrong with a given name, the potential line drives to the head, there's a cornucopia of possibilities depending on the company. The long shots I own can turn on a dime, and their success or failure may be driven by a single event. That would explain Premier Exhibitions (PRXI), which has been on fire lately. But time is drawing near for the results of its Titanic asset auction to be released, and if there's no buyer or if the winning bid is less than anticipated, that's a line drive to the skull. We'll know on April 15.

If a company like Gannett (GCI) was unable to sustain its newly increased dividend, which supports a nice 5.6% yield, watch out. The company is already viewed with great skepticism, and the dividend increase has not helped matters. In time, it should.

As a value investor, I also tend to buy turnaround situations. These can fall apart quickly. If Cosi (COSI) can't show real progress in the next couple of quarters, goodbye. If Denny's (DENN) falls off the recovery path it's been on, watch out. If Wendy's (WEN) can't deliver on its new initiatives and finally start showing a decent bottom-line again, investors will give up. If Midas' (MDS) strategic alternatives effort produces nothing, hello $6. The list goes on.  

Watch out for the line drives. I'm much more accustomed to the lingering death of the dreaded value-trap. Maybe that's why I could not get out of the way of that baseball. Or maybe I'm just getting a little long in the tooth.

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