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John,
You're not confused, I just didn't explain my definition of risk <G>.
Take EGGS for Example. If I bought 1000 EGGS at 25 the amount at risk is
not $25,000. The amount at risk is 1000 x (25 -21 3/4) or $3250. I'm only
risking the difference between what my position is currently worth minus
what I get when I sell it. Since worse case I'll sell it if it hits my
stop, the stop price is used in the risk calculation. Actually I should
also allow another small amount for slippage in case I can't get out at my
stop price, but I just ignore that to make my calculation simple. Therefore
such a $25,000 position would represent 12 1/2 per cent of a $200,000
portfolio, but only about 1 1/2% of that portfolio would be at risk due to
the protection provided by the stop.
No I don't have any rule that will not let one position become too
large a per cent of my portfolio. I'm more than happy to let any position
grow and grow until it hits a target or a stop. Since I maintain fairly
tight stops I don't usually have too many of those positions. AOL currently
represents about 30% of my overall portfolio but is getting close to my
target.
My money management rules only apply to adding new positions. The
targets and stops naturally take care of existing positions <G>. I guess I
would have been more reluctant to pick EGGS for this weeks pick if AOL was
50% of my portfolio even if they are very different types of internet
beasts. Actually my thinking was more along the line of I would still like
to have some internet exposure when AOL hits my target <G>.
Holding new positions to only 5% of my portfolio wouldn't work for me.
I personally think 20 positions is too many. However, that's just my level
of comfort in that I think fewer positions work better for me. If 5% works
for you that's great. At least we agree on up to 40% in one sector <G>. I
also agree that options are more fun. The point I've tried to make all
along is that many systems work. The important thing is to fine one that
you understand, are comfortable with, and can stick to.
JimG
----- Original Message -----
From: John Manasco <jmanasco@xxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Monday, December 28, 1998 9:19 AM
Subject: Re: Building Blocks - Money Management
>Hi Jim
>
>Well maybe I'm confused but that is not at all out of the ordinary for
>me. Your rule #2 states that you use no more than 3 to 5% of your total
>portfolio value on any one position. Does that mean that you are never
>fully invested since you only hold a maximum of ten positions? I don't
>think so. If you initially open a position that is 10% of your portfolio
>and it doubles it will of course become a larger percentage of your
>portfolio. Do you have any guidelines that will not let one position
>become too large a percentage of the portfolio? I've never seen you
>scale out of a position or try to rebalance your portfolio. I've also
>never seen you try to pyramid a winning position. If you have a really
>large profit in one position in an industry group would you hesitate to
>add a second position in the same group in order to hold your total
>exposure to a group down?
>
>For what it's worth I've tried several approaches to money management..
>The rule I hold hard and fast to is to never open a position with more
>than 5% of my trading capital, and many times it's less than that. I
>don't scale into or out of positions either. I feel if I did my homework
>and have good exits and stops that I should open the whole position at
>once or not at all. I do however tend to have up to 40% of my portfolio
>in a particular sector if I really think that sector will be moving. I
>am basically a momentum player. I also have a speculative portfolio
>which I define as funds that can be wiped out without any adverse effect
>on my life style. Basically I trade options with these funds. Over the
>last two years that's where I've had the most fun. It started out as 5%
>of my portfolio and is now about 20%. Tomorrow it could be zero. But
>what is life if not to have fun.
>
>Cheers
>
>John Manasco
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