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Stock Picks Bob's Advice
Sunday, 6 March 2005
A Reader Writes "When do you think I should start to purchase more stocks?"

Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor, so please consult with your professional investment advisors prior to making any investment decisions based on information on this website.

I do however enjoy receiving mail from readers and if you would like to drop me a line, you can reach me at bobsadviceforstocks@lycos.com. Please remember that I cannot answer all letters that I receive and I cannot address individual investment issues....those are the things you need to use your own professional investment advisor to assist you with.

A week or so ago, Chris, who is a student over in Boston, Massachusetts, inquired about a class project. I answered him in the blog, and he has followed up with a progress report! (Thanks Chris for keeping me posted!). Chris wrote:
Hey Bob,

Sorry for the late response. Originally I had posted a comment but I
guess it didn't appear on the blog. What my partner and I decided to
do was use a variety of stratgies. We decided to each pick 3 stocks
and screen them with the suggestions you made. When my professor
returned out paper he said that your advice was sound in that it is
essential for us to follow the steps that you outlined, however, he
mentioned that we should use even more sources just to justify the
validity of your method.

My half of the portfolio mainly consisted of things that were a bit
safer including a blue chip and one of the stocks in your portfolio,
while my partner decided to invest in a mining company to balance our
beta, a reit, and another company which I don't recall at the
moment.. With the six stocks chosen I used 300,000 or so of our
million dollars. Now I will put your selling policies into place but
I was wondering when you think I should start to purchase more stocks.

Thanks for the time you put into helping us. It was a long entry
with a lot of great advice. If the return on our portfolio's was
real we'd surely pay you a fee :)

Chris
Well Chris, let me see if I may be of assistance. I think your professor's suggestion of using more sources is a good one. However, I suspect that the sources that I have been using are probably more than adequate. But more is better :).

You said your half of the portfolio consists of "...things that were a bit safer including a blue chip and one of the stocks in your portfolio". If I was your professor, I would inquire why you decided your picks were "safer"? And balancing with a mining stock and a REIT....well, this is getting interesting!

O.K., so you have used $300,000 of your $1 million to get started. When should you buy additional stocks? Well, from my perspective starting out at 30% invested is probably way too conservative. I think that 50% invested would be a great place to start. I would of course suggest that you look through my blog and page back through prior posts the last few months....as long as latest earnings are intact...you probably could find a few more stocks of interest. The stocks on my blog run the gamut in size and maybe you would be comfortable with a coupld of them.

My buying and selling strategy for a portfolio, that you could certainly adapt for your use, consists of an "internal barometer"....that is I like to use the performance of my own stocks to tell me when I should be buying and when I should be, as I like to say, "sitting on my hands."

What I would suggest is that you invest your $'s in your portfolio in fairly equal amounts among the different stocks. Predetermine how many stocks you want to have to feel adequately, yet not overly-diversified. For argument sakes, let's say 20. (I use 25 in my trading portfolio and am currently at 22.)

If you are at 50% invested, I would think you should thus be at 10 stocks. However, if you have only 6 stocks at 50%, well then 12 stocks would be your max.

I would suggest that your minimum # of holdings be half of your original # in your portfolio. I hope you are following. Thus, if you start at 6 stocks, you could drop down to three. If you get down to three stocks, I would then replace them if they are sold. If you get up to your maximum # of issues, for instance 12 stocks in this example, then if you have a signal to add a position, simply ignore this signal and instead add to your cash position.

O.K. what ARE the signals you are asking? Well, it is simple, as you know, I like to sell losers quickly, and winners slowly. These sales on gains or losses are the signals I use to add to the positions, or add to the cash.

There is an interesting book that you might like to discuss with your professor called "How to make $1,000,000 in the Stock Market Automatically!" by Robert Lichello that helped stimulate my own thoughts on this process. He does something rather different, but it is an interesting theory on portfolio management.

O.K. back to the signals! First, I have sale points on stocks rising in price. (I actually do this stuff!). What are they? For me, I sell 1/4 of a position remaining each time (1/4 of the shares), at sale points of gains of 30%, 60%, 90%, 120%, then by 60%: 180%, 240%, 300%, 360%, then by 90%....etc. I haven't got to those levels yet...but have sold some shares at 240% gains!

These sales on a gain, are signals that the market is in a healthy environment and I add a position (if I haven't reached my maximum # of positions in my portfolio).

Now on the downside: first sale is at a loss of 8%...out the stock goes. No matter how long I have held it. I usually give it at least a day :). However, if a stock has risen enough to have sold a portion at a gain, I will do the following: after the first sale (30% range), I sell if it hits "break-even". After that, I sell if it retraces 50% of its highest sale point...that is if I sold a portion at 90% gain, I will allow the stock to retrace back to 45%.

I also will sell a stock if there is something fundamentally wrong reported....like bad news. However, I really have been moving away from this, I don't want to have much "subjective" input on my holdings, and would prefer to let the market dictate my actions.

Well that is about what I do! I hope you can follow. See what your professor thinks and get back to me. I have enjoyed our correspondence and wish you well in your class!

Bob


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