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 so please remember to consult with your professional investment advisors prior to making any investment decisions based on information on this website.
Checking through my mail recently, I had a nice note from Stan B. who wrote:
Bob,First of all, I am going to remind Stan and all of you that I truly am an amateur investor and not a financial advisor, so I cannot specifically advise you on what you should buy and when, etc. However, let me once again share my thoughts on how to build a portfolio.
I just retired from Dentistry. Am interested in setting up a portfolio that I can manage myself. Have opened an Ameritrade account & started watching some stocks. Will start with approx. 100K Do you have any advise on the method of getting started?
Any of you are welcome to share my idiosyncratic rules of trading, but I would again suggest you work with a professional investment advisor.
I would like to break down this discussion into a question of how to start, what stocks to buy, when to sell your positions, when to add new positions, and how to try to "time the market", that is, how to use your own portfolio to help you know when to be in equities and when you should be shifting into cash.
First of all, let me suggest that you define a goal of number of stocks to own in your portfolio and stick with it. For the sake of safety, for a $100,000 portfolio, let's figure on 20 stocks. I would not suggest margin, even though my own trading account is up to my ears in debt. My current goal is to pay it down in a disciplined fashion.
If you are starting out investing, you don't really know whether this is the best time to buy, the worst or somewhere between these extremes. I like to label this middle investing posture as being "neutral". So what does that mean? If your maximum is 20 positions, I would start at 50% cash and 10 positions. I would go down to a minimum of 5 positions and a maximum of 20.
However, I wouldn't rush out and pick ten positions, although that is a reasonable approach as well. I would apply my own rules for picking stocks, and slowly build up to the 10 stocks knowing you have "permission" to add new positions up to these ten. How much in each position? I wouldn't be going so much at the number of shares being the same, but rather the dollar amount being fairly equal. Thus, with $100,000 starting out, I would take $5,000 positions of each stock.
Which stocks to buy? I like to use what I call a "Zen" approach to investing. I try not to think too much :), but prefer to analyze what the market brings to my feet! In other words, I start looking at the stocks making large percentage gainers. From these, I check the latest quarterly earnings report to make sure that both revenue and earnings are growing positively. Next, I look at Morningstar.com at a "5-Yr Restated" financials to make sure that items like persistent revenue growth, earnings growth, positive free cash flow, and a healthy balance sheet is present. After this, I look at "point & figure" charts, as well as some "key statistics" from Yahoo. After a stock passes this muster, I list it in my blog. Of the stocks I list, I have purchased an actual trading portfolio of stocks.
O.K. you have gotten to ten positions, what do you do now? Here comes my own trading rules. I will sell stocks on what I believe is serious fundamental problems that might range from an SEC investigation into fraud, grossly terrible earnings or news, or anything similar. Otherwise, the key to success, imho, is to sell your losers QUICKLY and to sell your gainers SLOWLY.
This gives your entire portfolio a very aggressive posture that is optimistic and oriented to success and not failure.
On the upside, I like to sell 1/4 of a position at my own "targets" in %-appreciation. What I mean, is that if a stock appreciates 1/3, I would thus have 4/3 of value. I "sell my winnings" my selling 1/4 of my holdings at a 30% gain. I just did that today with my VIVO stock if you read my earlier post today. I repeat this at the 60%, 90%, and 120% gain levels, and YES, I have hit these sale points with some of my stocks!
Since after 4 such sales, I have essentially taken out my original investment amount, I slow down and stop punishing my successful position. That is, I go to 60% intervals: 180, 240, 300, and 360% gains. I have actually hit a 300% gain level, but have yet hit anything at 360%. After that I plan to go to 90% intervals x 4, then 120% intervals, etc.
How about on the downside? All new positions are sold as soon as I can after they have hit an 8% loss. Otherwise, if I have sold a stock once at a 30% target (like my Affymetrix (AFFX)), then I wait until the stock hits breakeven on the downside before unloading. After two or more sales at 60% or higher gain levels, I let the stock pull back to 50% of the highest gain level before unloading it. In other words, if I have sold a 1/4 position at a 60% gain, I will let a stock retrace to a 30% gain level before unloading all remaining shares.
How about the "timing the market" bit? One of my own biggest mistakes in investing is to sell a stock at an 8% loss, immediately re-invest the proceeds and go ahead and lose some more money! Thus compounding my losses!
This is again where the "Zen" approach comes in. Simply listen and watch what your own portfolio is doing and you will get a feeling for what the market is doing. This is something that I picked up from William O'Neill who in his writings always says to watch what your own stocks are doing.
But the thing I have added is sort of a "permission" to add a position. What I mean is that I use a sale at a gain as an indicator that it is safe to add a new position (up to my maximum number of positions.) When I sell a stock, I have to sit on my hands. Hopefully, in a big bear market, as some of my stocks, especially my newest purchases, hit sale points, this rule will help move my holdings into cash and I won't be replacing them unless I get down to my minimum investment position. Again, if half of a full complement is at "neutral" then the minimum would be half of that. If you have a maximum of 20 positions, you would drop down to 5 positions and then consider replacing them if they start hitting sale points.
After you get to 20 positions, and you sell at gains, then add to your cash. Consider adding position 21 if you get to a $5,000 cash position and have a buy signal. But don't add a new position until you have significant cash at least as big as an average position.
Wow, that was a long talk. I hope that was helpful. Please let me know if you have any other questions or comments. I am still working out a lot of this strategy as I am sure you can tell.
Will this work for you? I frankly don't know. It has been working for me!
Good luck and email me at email@example.com if you have any questions or comments.