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Wednesday, 19 November 2008
Why Portfolio Management is Essential to Preserving Capital

What is an individual investor to do?

Is the market closer to the bottom or the top?  Is it too late to sell or should one move to cash?  Is it time to 'bottom-fish'?  Are we on the verge of a Great Depression 2 or is 2009 to find us with indices pushing towards new highs?

I will be the first to tell you I don't know the answers to the above questions.

I am not sure anyone really knows.  

But I do believe that each of us has the power to implement disciplined approaches to our own portfolios that may assist us to avoid excessive exposure to equities when times are bad and help us to know when to be adding to equities when the market firms up and improves profit possibilities for investors.

What I have been doing isn't very complex.

I have been using the actions of my own holdings to direct me to either be adding to stocks or moving from stocks into cash.  It is that simple.

I am not sure this is a profitable approach; certainly there must be better ways to go about all of this.  I just know that I find it helpful.

Without discussing the which stocks I buy which I have written about elsewhere and shall certainly write up again, let me simply suggest that from my approach I am trying to own only the highest 'quality' stocks on the market.  We each may define quality differently, but there may be reasons why managing our holdings in response to market actions may be wise.

My approach is based on the belief that market actions may be interpreted through the price changes within our own portfolios of holdings.

Like a barometer responding to atmospheric pressure, my own portfolio is built to drift between 5 and 20 positions depending on the market's effects on my own holdings.  

Assuming that a maximum of 20 positions is utilized, I believe that 10 positions would be a neutral posture, 5 is most conservative, and 20 is most aggressive.  Once I have my holdings I either add positions (assuming I am under 20 positions), or sit on my hands with the proceeds---moving to cash (assuming I have at least 5 positions)---based on targeted moves higher or lower of my individual stock holdings.

These permission slips or directives to avoid reinvesting proceeds are the indicators I use to posture my own holdings.  It is that simple.

I have set appreciation targets for partial sales at 30, 60, 90, 120, 180, 240, 300, 360, 450%...etc., at which point I sell 1/7th of my remaining shares of that holding.  These sales are considered sales on 'good news' and they generate the signal to add a new position (unless at 20 in which case I do the opposite---sit on my hands).

On the other hand, sales on declines are used as indicators of sickness of the overall market environment as evaluated through the eyes of my own holdings.  Targeted sale points are either at an (8)% loss (if I own 6-20 positions) or (16)% losses (if I own 5 or less positions).  I have increased my loss limit for my last 5 positions to reduce my own trading velocity in a declining and highly volatile market.  In addition, after a first sale of 1/7th of a holding at a 30% gain, I sell all of my shares if the stock should decline to break-even, or sell my entire position if a stock has reached two or more appreciation targets (60% or higher), I move my sale point up to 1/2 of the highest % sale.  In other words, if I happened to sell a stock 3 times (1/7th of holdings each time) at 30, 60, and 90% holdings, I would move my sasle point up to 1/2 of 90% or at a 45% appreciation target for ALL remaining shares.

These 'bad news' sales generate a directive to NOT reinvest funds and instead to 'sit on my hands' unless I am at 5 or less positions.  In those particular cases, which I currently find myself in, these sales paradoxically do generate a buy signal to get me back up to my minimum of 5 holdings.  However, in my continued recognition of the need to shift from equities to cash in these situations, I have recently modified the purchase to a smaller holding--representing 1/2 of the average size of the remaining positions.

In fact, I have recently also been doing some more thinking on position size.  As above, when buying to replace one of the last 5 holdings, I buy enough shares for 1/2 of the average size of the remaining positions.  However, as the market presumably improves its tone and I wish to start once again increasing my exposure to equities, for positions 6 through 20, I plan on adding 125% of the size of the remaining positions.

These sales and movement into cash and back again, and these position sizing allows me the opportunity to automatically respond to market actions in some sort of rational fashion.

I hope that the current currection is short-lived, although I have my doubts about that.  In any case, I am positioning my portfolio to continue to have exposure to equities but to work hard at listening to my own portfolio as my own holdings let me know how to deal with the overall market.

Thanks so much for bearing with me.  I wanted once again to lay out my strategy in some detail.  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 2:14 PM CST | Post Comment | Permalink
Updated: Thursday, 20 November 2008 12:08 AM CST

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