|
PureBytes Links
Trading Reference Links
|
Anyone have a copy of Jim's "Narrowing the Universe" building block post? Please
e-mail directly to me to avoid cluttering the list. Thanks.
Craig
Jim Greening wrote:
> All
> Money Management was the last thing I learned as I came to understand
> the stock market and investment, but, of all the building blocks, it is
> probably the most important. Money management is nothing more than risk
> management and, if done properly, should help let you survive the rough
> spots with enough money left to take advantage of the good times. It's not
> complicated, at least the way I do it <G>, and is easy to do.
> The first thing you have to do minimize risk is to only enter position
> when the odds of winning are stacked in your favor. I discussed how I do
> that last week with my post on the "Direction and Timing" building block.
> In other words, only enter when the shorter term trend is running in the
> direction of the longer term trend and when it isn't, stay out. The next
> thing you have to do is to only select from stocks that have the
> characteristics that represented winners in the past. I discussed that a
> few weeks ago in my "Narrowing the Universe" building block post. The final
> thing you have to do is to decide how much money to risk on each position.
> In fact, some people say that this last part is their definition of money
> management.
> Before I get into specifics on how much money to risk on each position,
> I want to touch on my general philosophy I believe in diversifying to
> minimize risk, but I don't believe that more is better. In general, I think
> 5 to 10 positions mostly in different well performing industry groups is
> enough. If you over diversify you are going to guarantee average
> performance and that's not what I want. If I'm lucky enough to get a 200%
> gainer like I did with AOL, I want it to make a meaningful impact on my
> overall portfolio. In other words, I think its better to put all my eggs in
> a few baskets and watch those baskets carefully, then to use so many baskets
> that I can't keep track of them and my performance suffers.
> For my actual money management I observe the following rules:
> 1. Each position initially represents 10 to 20% of my portfolio
> although I may go less than 10% for small cap Christmas Special type stocks.
> 2. I won't risk more than 3 to 5% of my total portfolio value on
> any one position and I'm usually under 3%. This risk is defined as the
> maximum loss possible for the position. That's based on where my initial
> stop is placed.
> 3. No more than 2 positions in any one industry group.
> That's it, I told you it was simple <G>. However, it is a very
> powerful concept. It gets you to thinking about the risk involved in each
> and every position and makes sure that, if followed, you will have enough
> resources to survive a bad streak. If you are more risk adverse and less
> profit oriented than I am, you can decrease the position size and the amount
> at risk. If you can stand more risk, then you can increase the position
> size and the amount of risk, but I wouldn't go too far in that direction
> since my model is already pretty risk tolerant. The important thing is to
> recognize the need for a money management system and get one that you are
> comfortable with so you can follow it.
> Any thoughts or comments?
>
> JimG
|