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Monday, 27 October 2008
Refining My Investment Strategy in the Face of a Bear Market

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 advisers prior to making any investment decisions based on infrmation on this website.

One of my biggest goals from blogging about investing and sharing with all of you my decisions and trades is to develop a coherent approach to selecting stocks and managing my holdings in a fashion that preserves my gains, limits my losses, and adjusts my exposure to equities depending on the market environment.

If you have read some of my latest posts, you will notice that my approach has struggled in this awful market environment.  My investment strategy is to vary my holdings between 5 and 20 positions and to use sales on gains as signal to buy new positions (except if I am at my maximum of 20), and to use sales on losses as a signal of a poor market environment and simply to 'sit on my hands' with the proceeds of these sales unless I am at the minimum of 5 positions in which case, a 'buy' signal would be generated to keep me at my minimum equities exposure.

It is in this 'under 5 positions' environment that my system has apparently broken down.  To take serial (8)% losses only to replace these positions with new holdings that quickly accrue another loss is to compound my poor performance.  And I have been busy compounding :(.

So as of today I have implemented two changes that I would like to present and look forward to some of your comments.

As I have alluded to recently, when I am at 6-20 positions, no changes will be made.  However, at 5 or less, I shall first of all be more tolerant of losses.  That is, while normally I sell holdings after an initial purchase at an (8)% loss, in this minimal position mode, I shall increase my tolerance to losses to (16)%.  This is necessary due to the increased volatility of the entire market where the Dow routinely swings hundreds of points each trading day.

The other refinement is regarding the size of positions.  Up to this point, I really haven't had a consistent approach.  Position sizing will affect all of my purchases whether below 5 or approaching 20.  

Again, I mentioned earlier that I would buy a '1/2 position' in the under 5 environment.  To make this more exact, I will drop my fascination with buying shares divisible by 7 (to prepare me for my 1/7th sale at a gain), but rather if buying a holding to get my portfolio back to the 5 position minimum, I will determine the actual average size of my remaining holdings, and then purchase enough shares of the new position to equal 1/2 of that average.  

After getting back to 5 positions, assuming an appreciation of one of my holdings to my partial sale at a gain (30% appreciation over the initial purchase price) I shall continue to sell 1/7th of my holding, and then add a position equal to the average size of my existing holdings.

This will deal with two situations.  First in a poor environment as holdings are sold sequentially at less than 5 positions, I shall continue to add new positions that are smaller in size each time---equalling in size to 1/2 of the average of the current holdings.

As the market improves in tone, I shall add new positions equal to the average holding size, which assuming market improvements, will also increase in size over time.

Will this work?  I am not sure.  However, it has to be better than my current approach.  Rules are no guarantees to success, but thinking about trading rules ahead of time is more likely to provide me guidance better than 'from the hip' trading decisions.

I will keep you posted.  Meanwhile, if you have any comments or questions, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.

Yours in investing,

 

Bob 


Posted by bobsadviceforstocks at 4:12 PM CDT | Post Comment | Permalink

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