First of all I would like to thank you Don for taking the time to write!  I have enjoyed reading many of your own entries and watching you gather many 'fans' of your own on your Covestor page.  There is nobody on Covestor with as much enthusiasm as you have in teaching and sharing ideas with fellow investors!

But let me get back to your letter.

I will not spend much time talking about stock selection as you understand some of the basic premises with recent price momentum, solid recent quarterly and longer-term results, positive free cash flow, stable outstanding shares, and reasonable balance sheets as ideas that many of us share.

Currently I am trying to keep my portfolio at between five and twenty positions.  As you know, as my stocks appreciate to set appreciation levels (the 30%, 60%, 90%, 120%, 180, 240, 300, and 360%, and then 450, 540, 630%....etc.), I have chosen to sell a portion of my holding.

Initially selling 1/4 of my remaining shares, I have gradually reduced this amount and have now chosen to sell 1/7th of remaining shares.  Thus if I had 700 shares, I would first sell 1/7th of 700 or 100 shares, then 1/7th of 600 shares or 85 shares, then 1/7th of 515 shares or 73 shares, etc.

With these sales at individual positions reaching targeted levels, I use these sales as 'signals' that give me 'permission slips' to be adding a new position (assuming I am below my maximum of 20 holdings.  If at the maximum, I simply move the sale of the shares into my cash holding.)

However, I have not previously detailed my amount of a new position to purchase.  Mathematically, I have recently chosen to purchase a new position equal to the average size in dollars of the remaining positions.  I do this as long as I have at least 5 positions in my portfolio.

As you know, I have sales of positions on declines as well.  Simply put, after an initial purchase, I sell my entire position at an 8% decline if I have not sold these shares previously, and I am at 6 or greater number of holdings.  At 5 or less holdings, I am assuming that the bear market is severe and my tolerance has now been increased to a 16% decline.

After a holding has reached the first partial sale point at a gain, I move my sale point up from an 8% loss to break-even.  After more than a single sale at a gain, I have moved my sale point up to 1/2 of the highest appreciation point for a sale of the entire position.  Again I emphasize that sales on the downside are entire positions rather than partial sales as I implement on the upside.

As I get down to 5 positions, my sale target changes to a uniform 16% loss from the purchase price.

But I believe in maintaining 5 positions as a minimum.  Even if I am in a bear market and am handed losss after loss.  It is my reliance on my own exposure to equities that determines my own actions and response in the market.  Much like a parrot in a coal mine, these positions offer me a rational (?) approach to determining the market environment and guiding me in my own investment decisions.

I hope you are following me.

In addition, I have changed something else.  Previously, I have been pretty 'seat of the pants' in determining the size of the positions I shall be buying.  If I am buying shares in a position just to get me back to my 5 position minimum, obviously, the market environment is pretty awful (as it has been recently) and I should be working to reduce my exposure.  Since I am determined to have those five positions, I should at lease reduce the size of those holdings---and this is one of the changes I have implemented--these replacement holdings are now set as 1/2 of the average size of the remaining positions.

If I get up to 5 positions and I get a permission slip to be buying a new position as one of my 5 has hit a sale point on a gain----then I increase the size of the new position back to the 'average' of the remaining positions I hold.  Thus, as I move back up to 20 positions, the holdings should increase,  I continue to be in a relatively bullish posture until I get down to 5 positions---as I should---because between 5 and 20, I only get 'buy signals' because one of my holdings has been performing properly and has hit a sale point on an upward gain.

However, at 5 or less positions, as I sell them, I am buying new positions only to get my portfolio back to 5 and thus I am paradoxically getting a buy signal after selling something at a loss.  Thus, with these sales, I still replace to get back to 5, but buy a smaller position---1/2 of the average size of the remaining holdings.

Don, I hope this answers your basic question.  I know that my entire process seems far more complicated than necessary.  However, I believe it is a logical process and look forward to hearing more of your thoughts on this and whether you think it might in fact work!

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

Yours in investing,

Bob