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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 advisers before acting on any information on this website. Even as I answer your occasional emailed question, please always keep this in mind.
I have been having an interesting conversation with Eric N. who followed up his last letter with some more questions. I would like to share with you his questions as well as my responses. Eric, if you or any other reader has additional questions or comments, please feel free to leave them on the blog or email me at email@example.com. I enjoy receiving correspondence from readers and I hope that my my amateur yet experienced perspective is helpful to all of you. I do not claim to have all of the answers, or even that my answers are necessarily "right". I can only respond to your inquiries from my own perspective.
Thank you so much for answering my questions! You have been VERY helpful! I really appreciate the way you take the time to answer each question so thoroughly. I look forward to keeping you posted as I try my hand at trading.
Here are a few more questions for you:
Do you also have other investments in mutual funds, CD's, bonds, etc.? Or, do you stick to the stock market?
You have mentioned that you like to invest about $5000 in a new position. If I was to hold to this as well I would only be able to invest in 5 positions or so. Would you recommend having fewer positions and relatively more invested in each one, or more positions and relatively less invested in each one?
When charting the gain/loss of each position, do you use some sort of spreadsheet to do this (i.e. Excel) or does Fidelity.com provide the tools you need to track each position's information?
To avoid possibly losing more than 8% on a particular stock or the stock falling below half of its highest appreication target, do you watch your stock constitently throughout the day? Or, do you check everything out at the end of the day and make your moves then? ...or, do you do something completely different?
You talked about 'signals' from your portfolio. Are these the rules that you laid out yourself to determine when you should sell/buy, etc.? Or, am I missing the point?
As you explained your approach to buying and selling you said, "On sales on "bad news", I do not replace these stocks unless I am at my minimum level or 6 position portfolio."
Could you please expand on this comment? When do you replace the stocks? Is it only when you sell on 'good news' that you replace the stock and otherwise you just sit on the money?
Also, I really like the way you analyze various stocks, rate them, and give your take on the situation. It is great stuff! Keep it up!
Thanks for your help and sharing your wisdom with us.
Eric, thanks so much for writing. I do not claim that what I write is wisdom. You flatter me with those words. But perhaps it would be correct to say that I have been following the market and reading about stocks for many years and maybe from that experience I can share with you my best guess on your questions. As always, please consult with your professional investment advisers as you make decisions. I shall try to answer your questions from my own perspective.
First of all, insofar as other investments are concerned, I do have a retirement account at work that is chock-full of mutual fund investments. I am mostly invested in T Rowe Price funds, which is the fund family that I chose for my 403B. I recently was notified that my employer will be switching to Fidelity, where there are Price funds available, but I shall have to review those options at that time. I also have a small account with a broker-friend that is invested in some Unit Trusts as well as a few American Funds investments as well as a tax-free Muni bond fund.
I also have some retirement funds that are managed by professional managers who invest directly in individual stocks. I do not always know what is in those accounts, but when I write up a stock and suspect I own some shares, I try to doublecheck and post on my entry.
I do not own any Bonds directly. So to answer your question, I do have mutual funds and other managed accounts. But I have chosen to manage my "Trading Account" along the lines of my blog. I believe it will be successful, but this is an ongoing experiment for me.
You had a question about what to do if you put $5,000 in each position and could only own 5 positions. I do believe that is a perfectly satisfactory way to start an account. What I would suggest, is that you determine how much you can add to that account each month. For instance, you might be able to add $250 or $500 each month to the account automatically. Assuming you want to have $5,000 per position, instead of buying a new position when you sell a portion of a stock at a gain, I would instead keep adding that money to the cash side until you reach your new $5,000 level, and then add a new position. Figure out ahead of time how many positions you would like to have.
If you like the idea of 25 positions as a long-term goal, I would keep adding new positions regardless of how the existing positions do if there is enough cash until I got to neutral or 12 positions. If instead you wanted to have a maximum, for example, of 16 positions, then I would keep adding positions until I reached "neutral" in my investing posture, or 1/2 of the maximum positions which in that case would be 8. After that, I would only add a new position if I both had enough $'s, and I had a signal to add a position.
I have not been using any spreadsheet to follow my investments. Although it might indeed be a great idea! Instead, I use the information available on my Fidelity.com account (I am starting to sound like an advertisement...I suspect the same information would be available with other brokerage houses as well....just check before opening an account). I can see the current % change from investment, the account lists the closed trades so I can tell how many times I have sold a stock. For an investment like Starbucks where there have been several sales, I literally find myself counting on my fingers :) to determine how many sales and the next sale point. I am sure there are automatic ways which would be easier---I just don't employ them.
Again, on a sale on the downside, which as you point out would either be at an 8% loss after a first sale, at break-even if I had already sold a portion at a 30% gain, or at 1/2 of my highest % appreciation level if I have sold more than once at gains...I do this manually. I just check the account when I have time during the day. Sometimes I miss a buy or miss a sale. In which case, I usually check pretty close to opening on the next day.
On the "signals"....these are what I call the sales in my existing portfolio. I have divided these sales up into what I would label "good news" sales or "bad news" sales. The cases of good news sales are those times when a holding of mine hits a sale point on an appreciation move. For instance, reaching a 30%, 60%, 90%, or 120% appreciation target. At that time, my system dictates that I should sell a portion (as long as this is the first time the stock has hit that appreciation point), and this is what I call a "signal" to add a new position.
Sales on the downside are what I call "bad news". This "signal" is just a directive to sit on my hands and not, in fact, do anything.
So these are the "signals" I talk about. I also refer to this as my "Zen" approach. The ability to listen to my own portfolio which is 'talking ot me!'. This thought was derived from the William O'Neil CANSLIM approach where Mr. O'Neil, who I greatly admire, comments about the "M" in CANSLIM which for one thing means "Market". O'Neil suggested that one should try to get a feel for the market itself when buying. I don't have the exact quote, but I recall that O'Neil pointed out that when selling stocks at a loss, the market is essentially telling you that it is not a good time to be buying. About the worst thing you can do is to limit your losses and then buy another position in a 'bad' market that is declining. You will manage to literally compound your losses.
It really seemed to me that there should be a corollary with this, that is, if the market was telling you to 'sit on your hands' as the stocks declined and hit sale points, shouldn't there be a different signal within your own portfolio to tell you that the 'coast is clear' that it is a good time to be buying? It is from this that I thought it wise to use my own portfolio as stocks hit appreciation targets to be a "signal" to buy another position.
You asked about 'replacing stocks'. The only time I replace a stock on 'bad news' sales is when I am at a minimum position level. For me, I have set that up as 6 positions. Since my trading strategy depends on some sort of stock portfolio barometer, I need to be owning stocks at all times. Just not fully invested. Think of my investing posture as shifting between minimally invested in stocks (6 positions) and maximally invested (25 positions). I like to say that half way between these two 'postures' I am in a "neutral" position.
When I buy a new position on a sale on good news I am never 'replacing' a stock. That is, I have only sold a portion of my holding, so it is a new position. (I do reserve the right to 'change my mind' as I did recently, switching from my AZZ investment to my BLUD investment which appeared to be more in line with my own philosophy). At 25 positions, if I sell a portion on good news, that is appreciation, then I shall be using that cash (finally) to pay down the margin in my account. I do NOT suggest you use margin. My goal is to be reducing that margin amount. Margin does help on the upside as leverage but it also makes the swings more violent in a correction as your losses are magnified relative to your equity. Not a good thing for your blood pressure :).
On the downside, I "sit on my hands" with the funds or proceeds generated from a sale. That is, except if I am at my minimum number of positions which I have set at 6. Thus, with sales on bad news, as might happen overall in a severe bear market, I would expect my stock holdings to diminish in number and my cash to increase.
Years ago I read a book by Robert Lichello called "How to make $1,000,000 in the Stock Market--Automatically". You probably can find a used copy of this on Amazon for a buck. Might be worth your look. The take-home from Lichello was his search for some sort of automatic shifting between equity and cash in response to market action. His system was probably better than mine. Seriously. I suspect there is a big delay to my own system as my trades will lag the market. But there should be some effect in a prolonged bear or a prolonged bull market to change my own exposure to equities automatically. At least that is my goal.
I hope that my comments have not been too long, too tiresome, or too difficult to grasp. I don't think they are very complicated, I try to keep things simple.
I always say I don't think I necessarily have the best approach to investing at all. I am not even sure what I do will work long-term. But with the blog, I have been able to publicly set up a strategy for investing, set up rules for myself, and all of you can follow along with me as I learn what works and what doesn't. Thus far, things have been going very well!
Thanks again for writing and visiting! If you have any other comments or questions, please feel free to leave them on the blog or email me at firstname.lastname@example.org.
Wishing you a nice weekend!