How efficient is your portfolio?

The Buffalo Theory was explained in simple terms on the TV classic Cheers, and I have included it below. The great thing is you can apply this to almost any component of your life, relationships, sports teams and of course, Investing. While it can pay to ride out a storm and see your poor performing stocks return to glory, high risk investors will follow this strategy.

For those unfamiliar with the Buffalo Theory, here it is.

In an episode of “Cheers,” Cliff Clavin, the trivia-spouting, quirky, irksome mama’s boy mailman is seated at the bar describing the buffalo theory to his buddy, Norm Peterson, the beer loving heavyweight bar stool sitting perpetual patron.

Cliff expounds his “Buffalo Theory” to Norm:

“Well, you see, Norm, it’s like this. A herd of buffalo can only move as fast as the slowest buffalo. And when the herd is hunted, it’s the slowest and weakest ones at the back that are killed first. This natural selection is good for the herd as a whole, because the general speed and health of the whole group keeps improving by the regular killing of the weakest members.

In much the same way, the human brain can only operate as fast as the slowest brain cells. Now, as we know, excessive intake of alcohol kills brain cells. But naturally, it attacks the slowest and weakest brain cells first. In this way, regular consumption of beer eliminates the weaker brain cells, making the brain a faster and more efficient machine.

And that, Norm, is why you always feel smarter after a few beers.”

To apply this to stocks you simply trade out the weakest links and reinvest back into the high performers. A few weeks ago I wrote ‘Why I Sold 2 Underperforming Stocks’ which feeds into this strategy. I highlighted the worst two stocks I was carrying, and cut them from my herd. The days since has seen my portfolio achieve the strongest growth it’s ever experienced. Of course the results will vary depending on your own appetite for risk, portfolio composition and unpredictable market conditions, but the theory is fun regardless.

Now you might not want to apply this to your own holding, so at the very least when you sit down at Christmas with an ice cold beer (or alcoholic beverage of your choosing) you won’t need to feel guilty. After all you are making your brain more efficient.

This is our last post before Christmas. If you want to stay in the loop for when we are back on board, put your email in below. Merry Christmas and have a good break!