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 remember to consult with your professional investment advisors prior to making any investment decisions based on information on this website.
Checking my mail this evening I saw that I had a nice note from Steen S. who had some questions about my selling strategy. If you have any questions or comments, please feel free to drop me a line at email@example.com and I will try my best to respond, possibly right in the blog!
"Hey,I am a fairly new reader of your blog and listner to your podcast.I find the idea behind your system very good (about cashing in at certain % gain), but when do you decide to sell the rest of you holdings? Are you holding on to even very small number of stocks and sticking to the system or do you sell the rest at a certain time (exept from your loss sell signals).Steen
Steen, thanks so much for writing! I shall try to go over my selling strategy which I have described on many different entries in my blog and on some of my podcasts.
I do believe that picking stocks is only one part of the formula to successful investing. The other parts include knowing when to buy and when to sell and how much.
A couple of thoughts. First of all credit goes to the CANSLIM technique of William O'Neil who wrote the great book How to Make Money in Stocks, which if you haven't read, is definitely worth your time. O'Neil stressed the importance of limiting your losses. He recommended, and I have adopted the strategy of selling stocks at an 8% loss after a first purchase. This has certainly helped me limit my losses.
After this, I was faced with the problem of knowing when to sell if stocks did well. This is often much harder than selling when things are bad. It is tough to sell when you feel good about a stock. I have solved this challenge by setting up targeted appreciation points. At these points I sell a portion of my remaining holdings. Initially I chose 1/4 of my remaining position, figuring if a stock had appreciated by 1/3, I would have 4/3 of a stock and if I sold 1/3, well I still would be "whole."
However, after several rounds of sales I found that my remaining position was dwindling in size. And I just really wanted to sell some of my gains, not my original investment. Working with fractions of remaining positions, I chose and now follow the strategy of selling only 1/6th of my shares at my targeted appreciation points.
The general strategy is to sell my losing stocks quickly and completely and sell my gaining stocks slowly and partially.
My next challenge was to determine the appropriate sale points. I chose to start selling at 30% and by 30% intervals x 4: 30, 60, 90 and 120% appreciation targets. At each of these points I attempt to sell 1/6th of my remaining shares. After each group of four sales, I have been increasing the intervals for appreciation. I do this because after a 120% appreciation in the stock price, the stock has more than doubled, and for a similar appreciation in price, a 60% interval would be appropriate. Thus, my next four targeted appreciation points are at 180, 240, 300, and 360%. I have chosen to add 30% to the intervals after I have sold portions four times. That is after 360%, I add 90% x 4: 450, 540, and 630%....etc.
If a stock appreciates and doesn't announce anything fundamentally 'bad', it is possible that I never sell all of my remaining shares. At least not for a long time.
I do reserve the right to sell all of my shares at any time if something fundamentally negative is announced.
However, my system does allow me to sell all of my shares after I have sold portions of my stock holding on appreciation.
Again, reflecting thinking from William O'Neil who suggested one should never let a gain turn into a loss, I move up my sale point to 'break-even' after I have sold a portion one time at a 30% appreciation target. After this first sale, I plan on selling each position if they retrace 50% of the greatest appreciation target.
When I sell on 'bad news' whether it be on a retracement to break-even after hitting my first sale point at a 30% gain, I sell ALL of my remaining shares. For instance, if I have sold a stock three times at 30%, 60%, and 90% appreciation targets and then the stock starts trading poorly, my targeted sale on the downside would be at 50% of my highest sale point or in this case at a 1/2 x 90% or 45% appreciation level. Again these sales on the downside are for ALL remaining shares.
I hope that this answers your questions!
Let me just touch on the concept of "signals" or "permission slips" as I like to call it.
Again, I would like to express my appreciation to William O'Neil, who when talking about CANSLIM talked about determining the "M" in the "Market" in determining the timing to buy stocks. One thing he pointed out was that if one paid attention to one's own portfolio, one could learn quite a bit. In particular, he was discussing the fact that if a lot of your stocks are hitting sales at 8% losses, maybe your portfolio was "talking to you" more or less and saying that the market was not optimal for investment.
I use sales of stocks on 'bad news' as a reason NOT to reinvest funds, and sales of stocks on 'good news' as a reason to ADD a position.
First of all, I confess to having erred many times in buying a stock, sellling it in a 'disciplined fashion' when it hit an 8% loss and then buying another stock in quick succession only to lose another 8% loss quickly. I am sure many other investors have also made this same mistake! I realized that I was "compounding" my losses making things really worse in an awful market environment.
How could I avoid this? How could I learn to "listen" to my portfolio as O'Neil suggested? It was clear to me that if I had sold shares of a stock on 'bad news', meaning selling either at a loss or on a retracement to a sale-point, or even on 'bad news', then I should really AVOID compounding my losses. Or as I like to put it, I should leave the cash uninvested, instead just "sit on my hands"!
Well then, if I had just decided that selling on 'bad news' was a "signal" to "sit on my hands" then my portfolio really needed a mechanism to tell me to "buy a new position".
Some of this thinking, this search for a semi-mechanized approach to investing was likely influenced by another innovator, Robert Lichello, who had written, and I had read, the important book, How to Make $1,000,000 in the Stock Market - Automatically!. This is another great book to read if you ever get a chance.
Lichello, who developed the AIM system or Automatic Investment Management approach to investing, believed that the action of his portfolio could determine his response as he was regularly shifting between mutual fund shares and a money market fund.
My approach is NOTHING like Lichello's. But I do believe in allowing my portfolio help me understand what I should do in the market.
This search for a signal to buy, led me to the next step of using sales of my own positions on "good news" as a signal or 'permission slip' to add a new position.
However, it seemed obvious that I would need to always have some exposure to equities, thus, I would need a 'minimum' number of holdings in my portfolio. I needed to own shares because these positions were themselves the indicators of market sentiment. Trying to think logically, I chose to have a maximum number of positions at 25. (Currently I am at 11). Thus my "neutral" or starting position would be at 50% invested with 12 positions. My "conservative" posiiton, would be half of that or 6 positions and my maximum as noted 25.
Thus, if I am at my minimum number of positions (6) and I hit a sale point on bad news, then instead of 'sitting on my hands' I will go ahead and sell the stock and replace it with an appropriate new purchase as if I had a 'buy signal'. In the same vein, if I sell a portion of one of my 25 positions at a targeted appreciation point, instead of adding a new position, I shall be adding to my cash (or paying down my margin), leaving my total at 25.
When starting out, I recommend starting at 50% cash and 50% equities. If one wanted to have a maximum of 20 positions, then I would start at 10, and let market forces dictate to me whether I should be adding to or selling those positions. I would drop down to a minimum of 5 and a maximum of 20. This would more or less shift me in and out of the market based on market forces themselves.
I hope this answers your question! Once again, thanks so much for writing! If you have any other questions or comments, please feel free to write me at firstname.lastname@example.org and I shall answer the best that I am able. If you find the time, please be sure and stop by and visit my Stock Picks Podcast Site.