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This message has nothing to do with Metastock. Skip now or forever
hold your peace. :-)
It DOES, however, have to do with investment strategy, and a mistake
(IMHO) that I have seen several people make.
(Bob Xxxxxxxx) wrote:
>
>People who understand, that their own comfort is the most important thing about
>the stocks they hold, make sense to me. In this thread, one gentleman has
>already mentioned trimming the percent of his portfolio invested in stocks in
>a generally frothy market (to 40% in his case) as a means of maintaining
>comfort, regardless of what the general market does. Another gentleman
>mentioned stocks with comparatively low P/E ratios and staying clear of the
>short side of the market.
>
>"Let your stocks pay for themselves" is one addition I would like to make to
>this thread. Nearly everything is "fully paid and nonassessable" these days
>(and what isn't is typically destined to become outhouse wipes anyway). So
>it isn't that legal designation that I'm talking about. What I have found
>useful is the essence of the theory which I have heard stated as "if a stock
>you bought doubles, sell half and hold the rest, forever".
>
>I have found so much comfort and solace in the notion that I regularly compute
>a PFS Ratio (paid-for-stock ratio) for each of the companies that I own. The
>ratio is: the sum of all cash dividends or other distributions received plus
>the proceeds of all sales made net of the cost basis of the shares sold, all
>divided by the remaining cost basis of the shares I still have.
>
>Once I get a holding into condition that its PFS Ratio is over 1.00, I then
>feel entirely comfortable ignoring the ups and downs, trials and tribulations,
>successes and gaffes of management, and so forth, until and unless the stock
>triggers another comfort zone rule of mine: nothing is so good and free from
>risk as to be allowed to exceed X percent of my total portfolio (most of the
>time X is 5% for me, though I recently reduced it to 4% in order to do my own
>version of pruning back to my own beliefs on maximum equity exposure that
>makes sense under current blowoff market conditions).
>
>This second rule "maximum of 5% in *any* one company" is a bit controversial,
>with many mutual funds sticking to substantially the same kind of rule (at
>about that same level for the maximum), but with at least some others
>insisting that when they find something good they want to focus all of their
>attention on it and hold no more than 20 or 25 total stocks in their entire
>portfolio. Me, I'm not so convinced of the perfectness of my knowledge of
>the companies, nor even of the possibility of perfect knowledge for anyone,
>not even the insiders at the company, to be able to buy into the concentrated
>portfolio theory. So what's important to me is making sure that *no* one
>thing has the capacity to destroy any more than (5%) of my financial life at
>any one time, regardless of how bad things get.
>
>I've been through too many catastrophes such as (1) the OTC outhouse wipes
>that destroyed most of my finances in 1963, (2) the collapse of the beautiful
>and brilliant Burroughs Corporation, (3) the total annihilation of el primo
>de primos of credit and credibility Pennsylvania Central Railroad, and (4)
>the theft at 30 cents on the dollar by financial rapists in bank trustees'
>clothing of a major and very large holding which the matriarch of my family
>had steadfastly refused for more than 30 years to allow them to sell, until
>her voice failed so that she could no longer be heard when she tried to say
>no, and their greed for cherry-picking the holding (and replacing it with
>guaranteed negative return muni bonds at the absolute highest prices and
>lowest returns in more than three decades) became so great that they proceeded
>without authority to dump the holding into the hands of themselves or the
>others they chose to receive the gains which followed (only 3.5 years later,
>the stock is now selling back up at 118 cents on the dollar, which rise it
>began within weeks of their theft of the stock). So the notion of allowing
>my portfolio to become excessively concentrated just doesn't seem practical.
>
>I have enjoyed the comments of others in this thread and hope that my own
>two additions -- (1) let your stocks pay for themselves and (2) maximum of
>5% in any one company -- prove interesting to others.
> Bob
In misc.invest.stocks, gordon@xxxxxxxxxxx (Guy Gordon) wrote:
Bob, please don't be offended, but this stuff makes NO financial sense
at all. You correctly state that it adds to your "comfort level", but
that is ALL it does. It does not improve your REAL financial
security.
Take your first rule: Once a stock has exceeded some percentage rise,
you state that you can ignore its ups and downs. Well yea, you can
IGNORE them, but that doesn't change the FACT that you can loose a lot
of money! It just means that you're comfortable loosing it.
Instead, you should keep a close eye on your investments. Let's say
you bought XYZ Corp at $10/sh. Due to good earnings it rises to $20.
You sell half. Now, according to your rule, you can ignore it when
the management makes bad decisions and starts loosing money? Why?
You own stock worth $20 per share. Pay attention to it! When the
reasons you bought the stock disappear, you should sell it.
Now take your second rule: No more than 5% in any stock means you
will own more than 20 to 25 stocks. Can you really follow 25 stocks
closely? Can you read 25 quarterly reports? Can you follow the news,
analysts reports, etc. etc. etc. on 25 stocks? If not, you should not
own 25.
On the other hand, if you really want that much diworsification, why
not buy a mutual fund, and let a manager watch the stocks. Or buy an
index fund and let the averages take care of it?
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