First off, like several folks on this board, I don’t have new money coming in from an external source, nevertheless I think I can give you some pointers from my experience. My situation is that my wife and I are both retired. We both have pensions, I have social security (my wife is Chinese so she doesn’t) and we have a basement apartment which we rent. Our basic living expense are currently met comfortably with our income. We do need to tap investments for major expenses.
Just for a bit of background, I seriously started converting my investing style based on what I was learning, mostly from this board, in 2016. That meant actually selling some longtime losers I had been holding (it’s only a “paper loss” until you sell). It also meant doing while learning which is probably the only way to really learn. I ended the year with about a 6% loss. I was not discouraged. I kept at it, ending 2017 with an astonishing 83% gain. I told my wife, “impressive as it is, don’t get too excited, we’ll never see that again.” So far this year I’m up 46%. Several folks who hang out here are doing better than I am. I’m not trying to impress you or predict the future. I could end the year with a loss, but unless the whole economy tanks (a distinct possibility), I doubt it. What you can learn here will change your life.
That brings me to an important question which does not get much attention on this board. Do you have a clear idea of your investment goals? How about a murky idea? Do you have investment goals? It’s actually a pretty important question. It will dictate how much time, energy, resources and attention you put into investing. I didn’t even take investing seriously until after I retired. I toyed with stocks before I retired, so I’ve been in the market a long time, but I did not really start to invest with purpose until quite recently. I anticipate that what is currently a comfortable retirement income will increasingly become constrained over time as inflation drives the cost of everything upwards while my income remains more or less static. My goals are pretty simple. For me, investing is an activity meant to secure a financial future for me and my wife such that we can continue to enjoy a reasonably comfortable life. Costs will continue to rise. I will need to purchase services I don’t purchase today (i.e., I cut my own grass now). My wife is younger than I am by nine years, in all likelihood she will outlive me, but once I die, my pension goes away. I don’t want her to struggle financially. And health is always a wild card. Then secondarily, I would like to leave a good bit of money to my daughter, if I can make her life financially comfortable that would be a good thing. But, I have no desire to become wealthy beyond those goals. If it happens, I will have to consider what to do with the money. Not many folks seem to have a goal about why they want to amass money. For me anyway, money is not an end-game, it’s a facilitation. Your investing goals are worth spending some time thinking about.
Anyway, more to the questions you asked, while I don’t have new money coming in, I do “rebalance” occasionally. And sometimes I find something that looks so promising, I have to get the money from someplace to buy it, that means selling something else because I usually carry less than 0.5% cash. I use margin only as a stop gap. I don’t carry margin debt for more than a month.
So let’s talk about selling to raise capital first. I have a sort of a loosely defined threshold of 12% of my portfolio as a maximum position size. I say “loosely defined” because selling an overweight position is not a mechanical exercise. I never sell unless I already have a reinvestment target (or need the cash for some expense). But when I do sell, any position over 12% gets first consideration. If I really like the company I might leave the position alone.
Next thing, I don’t hold any positions that I wouldn’t buy today. For me, there is no “hold” investment status. If I don’t think it’s worth buying today, why would I hold it when there’s other companies I would buy. I don’t know what any analyst is thinking when they rate a stock “hold,” but to me that’s nonsense. The other thing I consider when selling is capital gains tax. I’m not guided by the tax implications, but it is a consideration. If I can wait a week or two for a short term position to become long term before I trim it, I’ll probably wait.
So, one way or another, cash becomes available in order to make some new investments. If I had a predictable monthly inflow of funds, I would probably hold a larger cash position. I would not feel compelled to invest every penny as soon as it became available. In fact, consider that another bit of advice, be patient. I’ve never bought anything “at the bottom.” I’ve never been deterred based on a recent stock price runup. Waiting for a 15% dip is absurd in my opinion. If I decide to pull the trigger on an investment, it’s based on what I perceive the future prospects for the company. The past is useful when it comes to analysis (although I consider stock price history as not a very useful tool). Stock price history plays no role in my buying decision because it’s irrelevant so far as I’m concerned. I always buy at market, I don’t use limit orders. I also never set a price target or develop a preconceived exit strategy (like selling call options or whatever). My buying and selling decisions are based primarily on the company’s products/service offerings and recent business performance. Of course, there are a number of other consideration: competitive landscape, management, moat, geographical location, etc. But all my investment decisions are based on what is traditionally referred to as “fundamentals.” This is one of the reasons this board is so valuable. Saul recently pointed out the hidden earnings in TWLO, I don’t think I would have ever seen that on my own. I don’t have the years of experience he has. I first purchased TWLO in April. It’s up 42% since then (which is an average, I’ve added to the position since then).
Technical analysis might work for some folks. I get it, herd mentality is predictable and you can decipher and predict it from studying stock price movement. I just think doing technical analysis is error prone and besides, it will consume far more time than I’m willing to invest in learning it. Investing is not the only activity of my life. I already find it hard to spend as much time on it as I think it deserves and I’m retired, my kid is married and lives on the other side of the country. You might think I’ve got time to burn. I don’t.
Another bit of investing advice, don’t set a timetable for buying or selling. True, cash in your account is idle, that’s why I stay fully invested, but if I had money coming in on a regular basis I would not feel compelled to buy something the moment cash entered my account. Don’t hesitate to buy more of what you already own. Every new company becomes a research burden.
Research is an ongoing activity, it doesn’t end with the buy decision. Try and stay aware of everything that impacts your current holdings while you absorb information about new opportunities. Buy (and sell) in increments, don’t feel like you need to take on a full position all at once. This gives you a way to get in once you’ve decided to make an investment, but it also gives you an opportunity to continue to study the company as you build (or exit) your position while still learning about it.
I’ve rambled far more than I planned, but one final word and I’m done. I’ve got a bit of a gambling streak in me. My parents never gave me an allowance so I worked for my spending money. I caddied at the local golf course. I pumped gas. Me and couple of buddies had a grass cutting business in high school. I played guitar in a rock band. But I made most of my money playing poker. If some tiny company captures your imagination, but there’s really not much history to look at, and even if there were, for tiny companies it often doesn’t tell the story anyway. Don’t be afraid to hold two to three speculative positions. Just be very prudent. About 0.5% of my capital is in three speculative positions. Actually, make that 1.2% but that’s because one of those tiny companies is doing pretty well and has grown into a 0.9% position. The other two are off about 50% since I bought them, but I didn’t buy much, so the loss doesn’t really bother me. I still hold all three positions.
I hope you find some useful information in all that. I won’t end with “good luck.” Investing isn’t about luck, though you may get lucky occasionally.