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Stock Picks Bob's Advice
Saturday, 25 November 2006
A Reader Writes "...thought you might be interested in this observation."

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.

One of my favorite things about writing a blog about my experience with investing and some ideas that I have had about how to do this, is to receive feedback from readers who also are thinking about investing and approaches to managing their portfolios. 

The other day I received a very nice letter from Imad Y. who wrote:

"Hi Bob,

I have been reading your blog on and off for the last
year. I like your strategy. However, going through
last spring's sell off (losses), I concluded that
something still missing on reacting to market.

After few observations, I think I found the missing
link (I could be wrong but it seems to work)

As market trended down earlier this year, you started
unloading stocks that hit -8% (Many did!)

What we can add to this strategy is that if the down
trend is market related, not company performance, we
should sit on our hands until the market starts
correcting then go back buy all/ most of the stocks
that were unloaded. The reasoning behind this is that
your selection criterion is strong; therefore at a
correcting market, what is better than buying strong
stock at a bargin price!

To verify this, you can pull the charts for the stocks
that you sold in April/ May and see how they did from
July onward.

Once again I could be off track since I am first-grade
amateur trader, but thought you might be interested in
this observation.

Regards,
Imad "

First of all, thanks so much for writing and thinking about what I have been writing!   I must tell you that there is a great deal of truth in what you write.  It would be very nice to sell stocks only that were dropping due to stock-specific news.  In other words, if the stock drops due to a market condition, then maybe ignore the drop...and hopefully as the market turns back up, the stock price will be moving higher once again.

First of all, let me review my four stocks that I sold the last six months on "bad news", meaning either fundamental information or stock price performance regardless of market conditions.  And let's see if your premise is correct.  I shall draw in a red "x" to show the sale point on all of these stocks.

First, Genesco (GCO) was sold on 7/12/06 at $31.59. 


Here you can see that indeed you are correct.  Genesco did continue to drop after my sale, but then turned around and rebounded to its current level...where it closed at $38.69 on November 24, 2006.

My next sale was Toro (TTC), which I sold at $44.06 on July 13, 2006.

Here is the current chart with the red "X" again being my sale point:

 


My next sale was Barnes (B) on July 17, 2006, when I sold my shares at $17.97.

 


Again Barnes (B) dropped further after my sale, but did indeed move to a higher level, closing at $21.06 on 11/24/06.

All three of those stocks were sold because of my own technical indicators, that is they had hit sale points that I had determined.  However, my most recent sale was my own assessment of a fundamental problem with earnings results.  Healthways  (HWAY) was sold on 7/17/06 at $40.64.


Once again, you are correct.  HWAY turned lower after my sale, but then moved higher to its current level of $46.01, where it closed on 11/24/06.  This particular graph is not quite as reassuring as the others but it is noteworthy that the stock price recovered.

Before completely agreeing with you, even though each of these examples does show price recovery in each of these stocks, I believe that this is more a testimony to my stock-picking techniques than a condemnation of my portfolio management strategy.

Let me explain.  You point out correctly that stocks may decline just due to market forces and that we should thus "sit on our hands".  I suppose you would also agree that selling stocks on fundamental 'bad news' is reasonable, and I would concur with that.  

My strategy of selling stocks even if the price decline is due to the overall market stems from my belief, that if it is all possible, it would be nice to be relatively underinvested in a bear market.  If the market is starting to maul all of the stocks, why would anyone like to be in the market at all?  Yet, how can any individual actually predict the overall future market direction successfully.  I do not claim to be able to predict where the market will be even a month into the future.  

My sensitivity to the Market  comes from my experience with the CANSLIM theory as advocated by O'Neil.  For him, being out of the market in overall market corrections, and being fully-invested in strong bull-markets is an admirable goal.  By giving each new investment a short leash, so to speak, I hopefully will avoid large losses due to a market correction, or for that case, due to anything.  However, there will be times that I shall be "shaken out", especially on newer stock picks.

So while I completely agree with you on your points in general, I plan on continuing with my current strategy.  I simply cannot know when I should be breaking my "rules" without losing complete control of my disciplined trading strategy.  

Also, you will note that as I hold stocks longer and longer, I give them longer and longer leashes so-to-speak, allowing them to pull-back and advance without a sale.  That is why, as my portfolio has "matured", I find myself trading less and less and sitting on my hands more often!

I sure hope that explains my behavior.  Thank you for pointing out your observations.  They aren't wrong, they just represent a different approach to managing a portfolio.  If you do try to make this modification, why don't you email me again in a few months and let me how it is working out for you and how you deal with managing your portfolio to prevent losses in case of a major market melt-down.

If you have any other comments or questions, please feel free to email me at bobsadviceforstocks@lycos.com or simply leave them on the blog.  Also, be sure and visit my Stock Picks Podcast Website where I discuss many of the same stocks and strategies that I write about on the blog.

Bob
 


Posted by bobsadviceforstocks at 10:35 AM CST | Post Comment | Permalink
Updated: Saturday, 25 November 2006 4:27 PM CST

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