Do Be Greedy

Well, so far I've learned that there's a direct relationship between the amount I've invested and the return I've earned. Given the funds that I have set aside for this purpose, I've only been 55% invested at a maximum since I've started this exercise. And on average, I'd say I'm usually about 25% invested. This is mostly by design as I've wanted to make sure that I have funds on hand in case the market has a precipitous drop that presents a great buying opportunity. But this also means that I've had a lot of cash sitting idle at any given point of time.

I'm going to make a slight tweak to my strategy. I've established a standard "ante" which I use to buy-in to a given stock. Assuming I guy in at the perfect time, I do not buy any more of the stock and later sell at a nice profit. But there are also occasions when I double-up or perhaps even triple-up my investment if the price drops further and the stock remains attractive. Of course, I sometimes deviate from the standard amount depending on my comfort level for the given stock. For example, I use a much smaller lot sizes for my "spice up" investments given their higher risk.

The tweak I am making is to increase the standard "ante" investment by 20%. This should increase my percentage of invested funds and decrease my already-low expense ratio.

Don't Be Greedy

This morning, the market was surging upward without hesitation. I had a sell price set on a certain security, but didn't want to leave money on the table, so I bumped the sell price up a bit. As you might guess, my initial sell price was surpassed, but my revised sell point was not reached, so I did not sell. Then the market plunged. So I still have my position despite my established sell price being reached.

Selling too early is always a bit disappointing as the price continues to rise after you've sold out. But not selling at all is much worse. So hold to your price!!

Trading Spice Up

I've been trading for almost two months and things are starting to get a little bit boring using my defined strategy. Don't get me wrong, I'm meeting my financial objectives, but it quite boring and there are long lapses of activity while waiting for buy or sell triggers to be met.

Given this, I've decided to "officially" amend my strategy to include a more speculative component. I actual started this in May by buying into TSYS (Telecommunications Systems), then closing out my position when I realized that I was not adhering to my stated strategy. I've seen several interesting opportunities pass me by (TSYS, RIM, ETFC) in the interim and have decided to take advantage of these in a modest way.

As with my main strategy, I've tried to establish a few rules:

1. Speculative stock should be limited to less than $10,000 in total.
2. Stop Loss limits may be utilized as appropriate as I do not wish to hold these for the long term in the event of a downturn.
3. No real selection criteria at this point, but obviously there should be some indicator that the stock represents a good value and has good prospects for the immediate future.

I'm interested to see if this leads to other bad habits!

Real Life Case Study in Company Specific Risk

Last week I removed the first company from my "watch list". Barnes Group reduced it's revenue guidance to the point where they no longer met my payout ratio criteria. Fortunately, they did not meet my price point prior to this announcement, so I did not own any Barnes shares. However, this does highlight additional risks that must be considered and reinforces the need to do the following:

• Constantly review the latest stock data to ensure a given stock continues to fit your purchase criteria.
• Be wary of stocks that suffer a drastic price drop. Be sure and check out all the latest news before buying in.
• Be careful about placing buy orders that will trigger automatically based on specific purchase prices. Your order will still execute after bad news has been announced.
• Understand that a similar event will eventually occur after you've' made a purchase and allow for that in your trading strategy.

If/when this last event occurs, there are at least three paths you can follow:

1. Stop-loss - Take your lumps and get out quickly. Personally, I hesitate to do this unless the news is truly devastating. But if that's the case, then the price will already be past a reasonable stop-loss price point anyway.
2. Hold - The stock is on the list for a good reason. It's assumed to be a sound company that can bounce back from bad news. So it would make sense to hold it for the long term. Logically, this is the course I would hope to follow in most cases.
3. Double-down - If indeed you believe in the fundamentals of the stock, why not buy more after the price drops? This is my Achilles Heel as it is too often my first instinct. However, I hope I can fight this and avoid "throwing good money after bad."

So this begs the question of what I would have done in the case of Barnes if I already owned it? I am marginally tempted to buy in now at the lower price point (and higher dividend yield), but I would hold I would avoid the temptation to double down. Despite the reduced revenue, they appear capable of maintaining the current dividend rate. So I would see little reason to sell immediately and I imagine I would hold this for the long run.

Micro Margin Strategy?

In the last month, I've watched the rise and falls of the market and specific stocks with great interest. In particular, I've seen certain stocks rise and fall by 2-3 percentage points on a frequent basis. It leaves me thinking that I should jump in with a significant amount when the stock hits what I perceive as the low, then sell out after a 50-100 basis point rise.

The intent would be to trade my usual 5-9% margin for a much smaller percentage gain, but to make it up in volume (greater number of shares and greater number of trades).

This is not my usual strategy and obviously has a lot of downside risk. I'm unlikely to actually pull the trigger unless the stock reaches my buy-in price, but the temptation to act as the more prototypical day trader is certainly there at times when I'm seeing volatility but am still sitting on the sidelines.

Diversification Lesson

I've broken one of my own rules. While acquiring other stocks, I purchased Abbott Labs, Pfizer and Merck, who are all in a similar pharmaceutical/health products market. Although I think all these companies are good purchases, and will work out well at the current price points, I should avoid this in the future. This sector is obviously lagging as I've sold all my other holding during the recent market surge, but these have not yet hit my sales price and I'm currently left with only these three holdings. I'm a bit exposed in case this sector would take a dive. But I didn't even realize it when I was making purchases because of the other stocks I was buying.

Another lesson learned. I should consider pharmaceuticals in the same way that I consider banking, energy and utility stocks in the future.

Volatility's The Thing

Today was the fourth straight positive day for the market and I had a light bulb come on. I've always heard day trader's talk about the importance of volatility and I understood it's importance on a conceptual level, but after today, I really understood the importance at a more practical level.

If the market continues in the current direction, I will soon liquidate all my positions with a nice little profit. However, I will be in a 100% cash position with no real opportunities for reinvesting in the short run since all of the stocks on my list are well above the "buy price" that I've set.

So I'm faced with three options (which aren't mutually exclusive):

1. Expand my universe of desirable stocks. Of course, I'm loathe to do this to any great extent because I am risk adverse. However, I will indeed look for other conservative stocks that I might have missed during previous screenings.
2. Raise the "buy price" for the existing pool of stocks. I'm equally hesitant to do this, but I think price histories should be reviewed to see if I might have initially set the buy price too low.
3. Set on the sidelines until the market drops a bit. I'm sure I will get antsy after a while, but I think this is prudent until the next light bulb clicks on.

It will be interesting how the market goes next. Although it would be to the detriment of my long term portfolio, I find myself wishing for a major correction.