Position sizing/timing

Investment Analysis Clubs Saul’s Investing Discussions
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Saul and others, when time permits, I would appreciate your thoughts on a glaring problem I face.

When I find a company that looks interesting to me, I often take a starter position to monitor it and see how it develops. Lately it seems I have been buying these starter positions, many times after a significant share price increase, and trading them for small gains in an attempt to buy back lower.

KITE is my latest example. I noticed it was trading roughly between 109-112, so I bought and sold for a 3 point gain, only to miss out on the outstanding news today.

So my questions are, how do you size your buys in a company after it already appears to have made a nice move, and how do you maintain your conviction sufficiently to avoid the temptation to take small gains?

Thanks for any insight!

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To head off the inevitable suggestion, I have read the knowledge base, and understand the points made. I think more specifically, I lack conviction to hold a stock after buying at what appears to be a spike, probably because the spike is what caught my attention, due to news or earnings.

And while I start with the intention of holding, my lack of conviction says grab the quick profit because many stocks due seem to trade in a range.

I need to be convicted. Wait, that doesn’t sound right…

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I noticed it was trading roughly between 109-112, so I bought and sold for a 3 point gain, only to miss out on the outstanding news today.

Wow, preferred investor, you just can’t make money consistently in the market that way. I’d strongly suggest you read the Knowledgebase, Parts 1-3, which is right at the top of the right hand panel on this page. It’s there to answer questions just like yours.
And, welcome to the board!
Saul

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To head off the inevitable suggestion, I have read the knowledge base,

Sorry, I answered you after I read your first post. Every stock that becomes a 10-bagger (going up ten times or 1000%) spikes up 10% many many times along the way. There are a lot of 10’s in a thousand. If you sell out right away for a 3% gain, you’ll never get the advantage of a good stock, just a few little 2% or 3% gains (and some losses) along the way.

Saul

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Thanks Saul. I recognize my weak point, and need to develop confidence in my picks,
so I can properly size the buys and remain steady unless the facts change.
Cheers!

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Dang, I wish there was an edit button.

When I review the very nice monthly updates provided here, I note that there is buying and selling,
sometimes for obvious reasons, sometimes not so clear. For example, you sold the majority of PAYC
due to slowing growth, but held a stub. Your reason for selling makes sense, but based on your reasoning, why continue to hold any?

BL and UBNT you traded in part based on over-reactions to earnings–one up and one down. These appear to be counter to the knowledge base suggestions, and has mirrored my history of trading. You made opportunistic trades based on the info available, and reversed course on both when your opinion changed.

I am not in anyway being critical of your moves, but in an effort to improve my results, am trying to understand your thought process. If KITE was cut in half due to a drug problem, I would be toasting
my decision to sell. So I ‘think’ it becomes an analysis of ones conviction in a company–and how fast that conviction can change day to day.

I hope this rambling helps explain my search for enlightenment.
And congrats on your results–your system obviously works which is why I am learn more.

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I would recommend going listening to a lot of episodes of the Rule Breaker investing podcast. You seem to be on the far end of the spectrum away from the Motley Fool philosophy to buy a stock with the intention of holding for at least 3 to 5 years (if not forever). I don’t know how many times I have heard people quote Warren Buffett saying that his preferred holding time is “forever”.

One philosophical difference with The Motley Fool that I have seen Saul mention several times is that their philosophy is skewed a bit too much in the direction of being averse to selling. From your post here, it sounds like you are skewed too far in the direction of being averse to holding.

Maybe the best thing for you to do is to buy a basket of shares in 5 different companies and make yourself a rule that you absolutely will not sell them within a given time frame (at least a year probably) unless there is a demonstrable change to your investing thesis.

Having bought shares in NVDA in late 2014, holding them, and seeing those rise almost 900% since has been a great way for me to grasp and embrace holding for a medium period of time. I am very glad I paid no attention when some non-investor friends suggested I should sell back in November 2016 after the boost from that quarterly earnings announcement. Earlier today, however, I did employ some philosophy of Saul by selling a portion of my NVDA position as it had grown to over 27% of my taxable portfolio (and I struggle to envision a bump from this upcoming earnings announcement after the price appreciation since May’s announcement).

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When to buy and when to hold.

EXEL. I just looked at EXEL. It is up (by market cap anyways) 7x since I bought it at $1 billion market cap. Unfortunately it also fell to a $300 million market cap in the interim, when I sold it.

I have found in my investing “career” that I only invest in great companies and even when disaster hits, it is not so disastrous after all, as long as I have patience.

With EXEL I had no such patience. I had not looked at EXEL for awhile. Hurt to see what happened with it.

I looked at a few other biotechs. Do you realize VRTX is now a $39 billion company! I made a lot of money on VRTX, but the opportunity cost of selling it was substantial.

Point being the cost of selling (opportunity cost lost) has outweighed the gains of being correct, so often, on swing trades.

We all invest differently, but in the end, from my perspective (intelligence informed by experience) it is more lucrative, and better conducive to living life, to buy selectively companies that you want to hold forever (or at lest 3-5 years) and not sell unless it is time to sell. And the time to sell has very specific rules.

One such rule is the stock is in a true bubble.

One such rule is that real discontinuous innovation is actually and substantially in the market taking market share.

One such rule is that you are simply utterly compelled and need the money to invest in something else or for some other reason.

One such rule is that the tornado that made the company simply ended. As an example, I sold out QCOM when the 3G tornado came to an end. The shares have done nothing over the last decade since then. But this would simply be a corollary of rule #3, as at that point (despite QCOM still being a great company) that there were simply other places to put money that I was utterly compelled to invest in and I needed the money (this said QCOM is paying out a nice 4.1% dividend currently - don’t see that every day).

I bring this experience up because we can be our own worse enemies. Emotions, life events, illness, so many things can distort our best interest as investors. These things are all things that are separate from the actual stock market. Being disciplined and having rules help reign in all these life things that get in our way of enhancing our investment lives.

In the end investing is a long-term venture that most of us try to follow on a short-term basis. And this gets us in trouble.

Tinker

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Hello, preferred investor -

Your post hit a nerve given that I do quite a bit o’ swing trading nowadays so I’m always mulling entry/exit points.

What I know: I have a strong tendency to buy or sell TOO SOON. It’s been a problem that has led to a number of work-arounds. First: I trade incrementally. No big bets for this boy. In a 20 stock portfolio, each allotment is a 5% position. That means I generally take 5 bites of the apple. First, a 1% entry position. Thereafter, it’s wherever the Market takes me. If all arrows point up, I buy more (generally in 5+% jumps). When in doubt, I do nothing. Should there be bad news I sell. I NEVER sell simply because the share price increased a few percent. A quick 20% pop? Sure, I’ll cash in some profits. I don’t pay much mind to minor fluctuations. This is where charts help depict what’s happening.

One thing I’ve discovered (being a “bottom-feeder” by nature) is that I often buy shares that have been beaten down, but buy more shares after additional single-digit price drops. I fight hard not to do that. Nowadays, I need a 10 - 20% price drop to buy more.

One additional thought: I never understand why so many investors view trades as unique binary events. So many write: “I sold my shares and never looked back” or “I sold my Amazon to install a kitchen. Sad regrets”. Say what!?! You can sell a stock and repurchase it later. No laws against that! I’ve circled back to repurchase shares of companies I sold months (even years) ago. If I see an opportunity, I try to capitalize on it. Price anchoring cuts in many ways. Folks sell a stock and then proclaim (after it appreciated 10%) that “it’s too expensive now”. HUH!?! That’s price-anchoring. Each and every day, I look at how my gaggle of stocks is doing. What happened yesterday means little. What matters is how my company is performing and how the market is behaving. Depending on circumstances I may very well repurchase shares I just sold (for a loss) in order to benefit from a perceived market opportunity.

May we all live long and prosper!

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You can sell a stock and repurchase it later. No laws against that!

Well, if you’re selling at a loss and plan to deduct that loss from your taxes, there is the wash sale rule to consider (61 day period, 30 days before and 30 days after the sale at a loss).

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Hi, preferred,

Sounds to me like you’re buying companies you don’t know very well, maybe not at all. If that’s the case, you probably need to build yourself some rules, including when to sell and what boxes to check before buying. (If not, skip this entire message.)

You must realize you’re in the graduate class here. It’s like MLB. It’s great to watch major league baseball on tv. It’s not so great to bet your life savings that you can hit against big league pitchers.

I’m not a salesman for TMF, but here we are in their wonderful community of “free stuff” including this discussion board. So I would strongly suggest you do the following:

  1. Subscribe to Stock Advisor or Rule Breakers, and follow their guidance (but don’t buy everything.)
  2. Buy their whatchamacallits–core holdings? or something like that – and then read each month’s issue of recommendations carefully and choose only the ones you believe in. (Some of these recs – and some of your investments regardless of the source – will be LOSERS, you MUST realize this.)
  3. Hold the “core holdings” or whatever they’re called, for 1 year minimum, no exceptions unless recommended by the service.
  4. Hold the others for a minimum of 6 months each, no exceptions.
  5. When you hear of a new investment idea, write down all your thoughts. Set a minimum time to buy after hearing about it of … I hate rules, but … maybe 7-10 days? (At least 2-3 minimum!)
  6. List 5-10 reasons (more is better) you would like to own the company for the next 5-10 years.
  7. List 3 reasons (or more) that would cause you to not want to own it any longer.
  8. Slow down. You don’t have to be fully invested this week or next. Or if you think you do, buy some ETF’s in your best-idea sectors or industries; they’re great vehicles for getting your feet wet, and many good investors use them often.
  9. Read, read, read. If you’ve been in sports and think you know competition, wait until the prize is not a trophy, but wealth. The competition is intelligent, fierce, well-read, experienced and ferocious - like nothing you’ve probably experienced. Don’t make it easy for them. Read, study, learn!

Good luck. Keep in touch regardless of your plan of attack, and keep reading here and everywhere that helps you learn.

Feel free to disregard anyone’s advice, including mine. Always make your own decision for your own reasons, especially in investing. Otherwise, be satisfied with having average market returns, which no matter what anyone tells you, is LESS than the S&P 500.

Dan

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You made opportunistic trades based on the info available, and reversed course on both when your opinion changed.

Okay, what I did was completely different than what you did. Here’s what you said:

KITE is my latest example. I noticed it was trading roughly between 109-112, so I bought and sold for a 3 point gain

There, you didn’t reverse course because your opinion changed. You were TRYING for a 3-point gain (a 2.75% gain, less commissions). I NEVER, NEVER, NEVER, do that. It’s just going for a tiny gain on a tiny part of your portfolio. I never buy a company unless I really like the company, feel the company has a chance to double, triple, whatever, and never buy with an exit point in mind. I buy it to keep it. I’ll hold it until circumstances change.

What you are doing is just trading. My son is a broker at Fidelity in High Frequency Traders (or something like that). He says most of the traders go broke within a year, not all, but most of them…broke!

You said:

Lately it seems I have been buying these starter positions, many times after a significant share price increase, and trading them for small gains in an attempt to buy back lower.

Why the hell are you doing that? I bought Kite at $47.00. I bought a little more the next week at $54. (You would have sold out at $48.50 and been excited about a 3% profit on your trade). I bought little bits more all the way up to $80. I bought more after it rose from $80 to $100 on good news. I bought a tiny bit more yesterday at $113 and $118. It closed at $120.

That’s how you make money in the stock market. Not what you are doing. Do you think I care if I paid $47 or $45? Should I have sold it to try to buy it back two dollars cheaper? It’s up 155% for me now. How many 2% trades would it take to do that?

You ask about PayCom. I originally bought at $37 and kept buying between $40 and $55, with a last small purchase at $60. I sold now because the circumstances changed at an average price of about $68, which is up 84% from my original purchase. What was a 9.5% position at the end of June is now a 1.5% position. But I kept it well over a year, and sold it because circumstances changed. This has no relationship to what you are doing. (Most of my trades are in IRA’s, but I have a few small taxable accounts and have a little Paycom in those accounts which will be long term within a week to a month or so, so as long as PAYC is holding up as well as it is, I’m waiting on selling those).

Again, let’s look at Shopify. I bought at roughly $27 or so over a year ago. It had been as low as $22 the month before but I didn’t know about it then. I didn’t try to trade it because I had bought it on a spike. On the contrary, I kept buying for the next four or five months up to $45 or so, where I eased off because I had a very full position. Again, that’s how you make money in the market, not on 2% trades. When it got $92 it became a 20% position and I decided it was too large and trimmed it back over the last two months to about 15%. When it came out with better than great earnings, it spiked but I bought back what I had sold anyway, because I felt this is a great company and it has a long way to go.

Sometimes I make mistakes, and I admit them, but that doesn’t mean I’m trading. I’m buying to hold the stock “forever” but simply change my mind if I have to. I NEVER buy to make a 2% trade.

I didn’t mean to make this sound like a tirade. I’m trying to help you get your mind around it and get your thinking straight.

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
that is on the right side of every page on this board

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Wash sale: you likely know this, but I learned through experience that the wash sale rule is an accounting issue-nothing says you can’t rebuy the stock in the given window, it just means an accounting adjustment if you continue to hold the repurchased stock into the next year.

As explained to me by CPA.

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Saul, thanks for your reply. A bit harsher than I expected, but probably deserved as I could see how it might be considered aggressive questioning.
Truly not my intention.

I have a variety of other investments so my questions pertain to my newer exposure to the high growth stocks found here. I have value type stocks held for over a decade with multibagger gains, but no where near the potential of these new millennium type companies.

We may be talking past each other–your example of buying SHOP in the 40’s is a sample. Would I have sold it at 50? Perhaps, but not if it was coming off a base. Buying SHOP today in the 90’s is where I am at–after an amazing rise, I have difficulty assessing its relative safety. Thus my question on sizing a buy after a big increase.

My preliminary answer is that my incremental buys should be smaller until I get comfortable that a new base has been established.

Cheers.

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Thanks to all the responses to my initial inquiry. I gained a great deal from your posts,
and am mulling over my biases with some self reflection on how to improve my results
going forward.

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preferredinvesto,

Next time before you sell for a 2% gain, watch this video:

https://www.youtube.com/watch?v=QX_oy9614HQ

Chris

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