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Stock Picks Bob's Advice
Friday, 4 November 2005
A Reader Writes "I hope you don't mind me picking your brain...."
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 and that you should always consult with your professional investment advisors prior to making any investment decisions based on information on this website.

Reading my mail this afternoon, I saw that a friend of mine, Jeff S. had written a note to me with a question. This is what he had to say:
Hi Bob,

I have been frequently visiting your blog and tying to make sense of the information you share. I especially like it when you explain your strategies of when to sell a stock i.e. 8% loss or 30% gain. If the stock gains the 30% and you sell of 1/4 of your position, then do you follow the same rule again i.e.. if it loses 8% sell all or if your remaining holdings or gains 30% again sell another 1/4? How many different stocks do you think someone could comfortably manage? I am very interested in trying a few stocks but really don't know how to get started. As I filter through your past bog entries, I make notes of your tips and techniques. I hope you don't mind me picking your brain for the answers to my rudimentary questions.


Thanks

Jeff S.
Jeff, first of all, thanks for visiting my blog and for writing! You have written me about my selling strategy, and I think you understand the bulk of my approach. However, just in case, let me summarize my approach to selling a stock.

After a first purchase of an investment, I only allow it to decline 8% prior to selling all of the shares that I own. I enter these sales manually, but I am sure there are automatic ways to set this up at the time of purchase.

However, I also sell portions of stock on gains. You could say that I believe that by selling losing stocks quickly and completely, and by selling gaining stocks partially and slowly, I am biasing my investments to stocks that are performing well. That is the essential philosophy to my selling behavior.

Back to selling stocks. If stocks move higher in price, I sell them a little at a time. I only sell the entire position of any of my holdings on some sort of bad news or decline in the stock price. Currently, I have set price goals of 30%, 60%, 90%, 120%, and then by 60% intervals: 180%, 240%, 300%, 360%, and then by 90% intervals etc. At each of these particular stock price appreciation levels, I sell 1/4 of my remaining holdings. Basically, I am trying to sell my "winnings". What do I mean by that? Well if a stock appreciates by 30%, you basically have 4/3 of a stock, and then by selling 1/4 of the holding, you are back to approximately 3/3 of the original investment.

How about on the downside? How does this affect my strategy?

I learned much from reading William O'Neill who is the publisher of the Investor's Business Daily. He is the one who influenced me to set 8% stops on my losses. He also makes the astute suggestion that once one has made a gain on a stock, that you shoud avoid "giving it back" and move your stop up to a break-even position. That is exactly what I do. If I have sold once, that is a 1/4 position after a 30% gain, then my sale point on the downside is 'break-even' not an 8% loss.

However, if I have sold a stock more than once, like I did with my Dell stock, which I had sold twice, then one should sell all of the remaining shares if the stock retraces back 50% of the highest gain point sale. That is, as with Dell, since I had sold 1/4 of my position at a 60% gain, when the stock retraced back 50% of the highest gain-sale point, which for Dell was at a 30% gain, then I should and did unload the entire position.

You ask about "how many stocks" one can manage. I find the number relatively easy with my Fidelity account online. The brokerage house shows me the % gain or loss of each of my holdings as well as the history of prior sales, so it is a cinch for me to calculate when I need to sell a stock either on a retracement or on a gain. I have a 25 position maximum. I think that 20 positions would be an excellent size for a portfolio.

One thing that I believe in is, when starting a portfolio, start at 50% equity/50% cash. I would call this a neutral bias. Allow yourself to go down to 1/2 of your original # of holdings....if you shart at 10, allow yourself to only drop to 5, and stick to your previous goal of 20. Only add a new position on a sale of a partial position (1/4) on a gain. Use this as a signal to increase your exposure to equities. On the other hand, assuming you started with 10 different stocks, I would suggest you drop down to a minimum of 5 positions. After that, replace the stocks in the 5 positions if they hit 8% losses. But use sales of portions of the exising holdings as a signal to be adding positions.

I hope this explains my approach a little better to you! It is an idiosyncratic (I hope that's the right word!) strategy that works for me. You are welcome to utilize this approach as well. If you do, let me know how it works out. If you or any other reader has questions, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.

Bob


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