My first question is, why not sell slightly OTM put options when you find a position that you’d be open to adding to but are waiting for a better value?
Hi Tim
First of all, I don’t use options, but I must admit that so many people have said good things about them that I’m tempted to learn more about them. Second, I never wait for a better value. If I like a company I always take at least a starter position.
Then if it stays flat or goes up, you’ve still pocketed the premium…
But you’re sold out of a rising stock.
And a second question is, why add positions slowly? You’re buying companies only after you’ve put in DD, and the companies you add are often valued very attractively. So I would assume that if you retroactively analyzed your portfolio over a long period of time, the average position would show that the 2nd, 3rd, and further positions you take in a given stock would be at higher prices than the original buy. There will obviously be some times that, soon after you buy, the price goes down to present a better buying opportunity. But if you’ve averaged around a 30% ARR, most of the time the opposite would be true -thus waiting to add to positions would usually lead to higher costs. And since we’re all investing for the long haul, wouldn’t we want to play with the law of averages?
Here are some of my ideas about buying (culled from the FAQ/Knowledgebase that Neil so kindly compiles (see post 4020). Please excuse some repetition.
Saul
I actually don’t have a fixed buying policy. That means you can rule out cost averaging over a predetermined time. I never do that.
I hardly ever have enough cash around to take a full position at the start, as I’m usually close to 100% invested – unless I’ve just sold out of a position for other reasons, which has freed up cash. Or if I really like a stock I might sell something else I don’t like as much or I decided was a mistake. But in general, I just take as much of a position as I have enough money for and hope to add later. (I might also sell a little from a position which I feel has gotten too large in order to get some cash).
I can also rule out: “I am tempted to wait and just buy a full position when the right opportunity arrives.” If I like a stock enough to take a position, I will always take at least a starter position, and plan on adding later. I never wait for the “right opportunity” to take a starting position. I do add to a stock when it goes down for no reason on an opportunistic basis, but you can’t take that as a rule, as some of my most profitable deals ever I kept adding on the way up instead of on the way down. (If I start buying at $25, adding at $28 or $31 might seem expensive, but when it gets to $75 or $120 the difference between $25 and $31 will seem negligible. Also if it’s at $25 and I wait for $22, to buy at a “cheaper price”, I’ll really kick myself when it’s at $120 and I never got in because of waiting for a $3 cheaper price.)
- Never miss getting into a stock because you are waiting to buy it 25 cents cheaper. The decision is whether you want to invest in it or not. Once you decide, take a starter position, at least. Don’t wait around for a slightly better price. When it’s at $50, I can guarantee that you won’t remember or care whether you paid $10.05 or $10.30, but you’ll be kicking yourself if you didn’t get in. (For a concrete example, a couple of years ago I bought some shares of a little unknown company AMAVF at $15 and change. It hit $170 for an 11-bagger in less than a year. Do you think I cared whether I paid $15.25 or $15.50? The issue is: Do you want to buy the stock? If the answer is yes, don’t fool around trying to buy it a bit cheaper. You are buying with a long-term perspective.)
I’ve argued several times against waiting for a price slump before getting in to a company. If you like it and are convinced, at least take a starter position now. I’ll never hold off buying, trying to get a stock 15 cents or 25 cents cheaper. When it’s at $35 a share, you won’t remember or care whether you paid $10.15 or $10.40 for it.