Building Blocks - Money Management

["Jim Greening" <JimGinVA@xxxxxxxxxxxxx>]

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