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Friday, 19 October 2007
On Dealing With Market Corrections!

It was a lousy day in the market.  The Dow closed down (366.94) points to 13,522.02 and the NASDAQ was off (74.15) at 2,725.16.  The S&P was off (39.45) at 1,500.63. What is an investor to do?

I took big losses in my portfolio as well.  I didn't miss the correction.  I am not smarter than the market and I get hurt when the market hurts.  

What I do try to do is to manage my portfolio by selling some of my holdings when times are good and limiting my losses when times are bad.  As an investor, it has been helpful for me to have a clear idea of when I need to sell shares both on the upside and on the downside.

Successful portfolio management must include some sort of disciplined process of stock selection.  I have my criteria; I am sure you have yours.

After that, it is just as important to have some strategy at limiting your losses on the downside.  I use an (8)% loss limit after an initial purchase; you might wish to use some other limit.  But it is wise to know exactly when you are going to sell a stock after an initial purchase.  I also move up these loss limits after the stock moves higher and reaches sale points on the upside.  The exact process isn't as important as the strategy of limiting losses and preserving gains.  Both are elements for success.

In addition, while some may suggest it is wise to 'average up', that is to buy more shares of your strongest stock.  I take a more conservative approach to investing, by insisting on selling small portions of my holdings as they appreciate.  Combined with limiting losses, preserving gains by these sales may be helpful in improving your chances for profits.

The other big element may be the issue of timing.  I believe in an investing barometer of my own stock holdings.  What I mean by that strange phrase is that is important to sense the tone of the market to determine if it is a good idea or not to be committing funds.  I am not a value investor as such.  I do not get more interested in buying new stocks as values improve and stock prices plunge.  I am interested in determining when the market is exhibiting a healthy trading environment before jumping in with a new investment.

I do this by listening to my own portfolio.

I believe in a limited number of positions in a given trader's portfolio.  For me, twenty is 'plenty'.  My maximum is 20.  My neutral position is 1/2 of that or 10.  My minimum is 1/2 of that or 5 positions.  

My goal is to avoid compounding losses by resisting the impulse to buy something else after a sale on a loss.  I avoid this, by requiring my portfolio to generate a 'buy signal' before replacing a recently sold position on the downside.  That buy signal is generated by another holding that generates a partial sale by reaching a price target on the upside.  That way, after a sale, I am directed to 'sit on my hands' with the proceeds.  And I continue to do this sale after sale, if needed, until such time as the market tone improves and one of my holdings hits its targeted appreciation level on the upside.

I cannot predict the market tomorrow or next week.

But I do listen to my holdings.  And they have much to say!

I do reserve the right to make my own arbitrary decisions based on new technical or fundamental data on the company whose stock I own.  But most time when I exercise this disgression, I wish I had simply listened to my stocks and their price movements.

These signals generate the stock barometer I utilize.  This automatically moves me towards cash or towards equities.  It isn't a quick barometer and requires significant moves in my holdings; but it represents some sort of rational effort to time the market with an emotional investor like myself providing the direction.

Will all this work?  I don't know.  I still lose money on bad days like today.  But instead of a panic, I can check my stock prices, see that nothing needs to be done, and sit on my hands waiting for better prices.  If the prices continue to drop next week, additional holdings of mine will be sold.  But it won't be my arbitrary decision, which might even be wiser, but rather the stock price movement itself that shall determine my trading decisions.

On a down day like today, it is nice to talke a little about philosophy.  I certainly don't have any great new stocks to discuss at the moment!

If you have any comments or questions, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.

Bob 


Posted by bobsadviceforstocks at 4:19 PM CDT | Post Comment | Permalink

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