Category: Trading School

If people really understood how long the long term truly was – maybe selling a stock every now and then wouldn’t be such a traumatic experience.

When you bought into the gospel of “stocks for the long run,” did you have any idea how long the long run can turn out to be? Exactly 10 years ago, the S&P 500 index was at 1164; it closed on Friday at 1239. That’s an annualized average return of 0.63%. At that rate it will take you 111 more years to double your money in the stock market. – 6/12/08 Wall Street Journal

I had lunch with a friend last week and he said – why don’t you simply sell after you have a 15% gain in the bag? My response was that you will never have a 25% or 30% winner if you always sell after a 15% gain. He said – it seems like you have more trades that go from 15% to 10% than 15% to 25%.

Just for the heck of it – I went back and reviewed all of the 2007 Real Money portfolio trades. There were 10 trades that traded over 15% that were eventually sold at a smaller percentage. Those trades were sold at an average of 7.9%. There were also 8 trades that sold over 15%. Those trades were sold at an average of 23.5%.

So, my “friend” was right. Using the 2007 Real Money portfolio as a proxy, I did have more stocks go from 15% to 10% than from 15% to 25%. However, the results were NOT better when using a sell target. That being said, I must admit that the difference in performance weren’t earth shattering.

Continue reading “Stock Trading Plans are Personal”

Wall Street has many great sayings. One that I try to live by is “let your winners run and sell your losers quickly.” Many people buy into the “letting your winners run” part, because they have also bought in to Wall Street’s buy and hold philosophy. However, unless you are planning on “letting your winners run” until retirement – you will need to sell at some point. So when do you sell. In particularly, when do you sell a winner? Let’s take a closer look.

If you really think about it – you have two options for selling a stock: selling as it is rising (into strength) or selling as it falling (into weakness). To accomplish yet another famous Wall Street saying, buy low and sell high, by definition – one must sell into strength.

Selling into strength is a proactive trading strategy. It requires selling when a stock is still rising but is expected to reverse. The problem is trying to determine if a stock is preparing to reverse or if it is simply pausing on its way higher. This is a critical decision point.

Continue reading “Let Your Winners Run and Cut Your Losses Quickly”

Not a day goes by that I don’t hear a talking head on CNBC talking about a well diversified portfolio.  Diversification must be a required course in money management school.  Here is a commonly accepted definition from the U.S. Securities and Exchange Commission’s web site,

One of way of diversifying your investments within an asset category is to identify and invest in a wide range of companies and industry sectors. But the stock portion of your investment portfolio won’t be diversified, for example, if you only invest in only four or five individual stocks. You’ll need at least a dozen carefully selected individual stocks to be truly diversified.

I have never been a big fan of diversification.  Most people end up di-worse-si-fying their portfolios by adding stocks in unfamiliar sectors for the sake of diversification.  It is a little easier with the advent of ETFs.  Now, one can simply choose an ETF for additional exposure as opposed to trying to become a good stock picker in many different sectors.

Continue reading “Buffett on Diversification”