As part of my continued effort at sharing with all of you readers my actual trades in my actual trading account, I wanted to let you know that this morning, shortly after the opening, I sold 15 shares of my 105 share position of Graham (GHM) at $86.00/share. Grahm (GHM) continued to do well today in spite of the awful market tone and actually closed at $90.50, up $2.45 or 2.78% on the day. Why did I sell any shares? Why 15 shares? Why today?
If you are a regular reader of my blog, you will know that I sell shares of stocks for two basic reasons: "good news" or "bad news". I define "good news" as a stock reaching appreciation targets...that is going higher in price...and reaching levels that I have set up artificially at certain percentage gain levels. To explain, I use 30, 60, 90, 120, 180, 240, 300, 360, and then 450, 540, 630%...etc., appreciation levels from the original purchase price as intermediate goals. That is when a holding reaches these levels, if it ever does, I initiate a sale of a portion of that holding.
When I first started this blog I believed if a stock moved higher 1/3 to 4/3 of its original price (an approximately 30% appreciation), then it made sense to always be selling 1/4. But that was, as I found out, far too extreme a portion of a holding to sell at these same intervals as my position shrunk in size as the stock appreciated in price.
I tried 1/6th....but again no luck. It appears that selling 1/7th of a holding is working at taking a portion 'off the table' yet leaving enough behind to see it actually grow absolutely.
The "bad news" part of a sale is when a stock is sold either because of some fundamental news announcement (like a poor earnings announcement or the management accused of wrong-doing), or simply because the stock has declined from a higher level.
Generally, after a stock has declined 8% I sell the stock if I have never sold any portion of it at an appreciation target. If, on the other hand, I sold 1/7th of a position (like I did today with Graham) and then the stock dips in price...I do not plan on waiting for an (8)% loss to sell, but instead move the sale price (of the ENTIRE position) to 'break-even'...that is, the price that I purchased the holding.
On the other hand, if I have sold a stock more than once at different appreciation levels...for instance if I sold a stock three times at 30, 60, and 90% appreciation levels...selling 1/7th of my holding each time....then instead of waiting for an (8)% loss, or even waiting for the stock to move back to 'break-even', I sell the stock should it reach 50% of the highest appreciation sale level. In this case, since the highest appreciation sale of this hypothetical holding was at a 90% appreciation level, then my sale point on the downside is if the stock declines to a 45% appreciation level. All of my sales on the downside are ENTIRE positions---unlike my partial 1/7th position sales on the upside.
Anyhow, I am sure that for you regular readers this commentary is entirely redundant. But if you are new to this blog, I hope you appreciate some of what I would call my "inner-workings" of my portfolio management strategy.
Finally, I use sales of stocks as signals. Signals that in the case of sales on the upside or "good news" sales, suggest that the environment might be o.k. to add a new position. I call this my "permission slip" to add a new position (if I am below my maximum of 20 positions).
Likewise, I use a sale of stock on "bad news" as a signal as well. In this case telling me that there is something 'bad' in the environment and that I am well-advised to do what I call "sitting on my hands" with the proceeds (again, of course, unless I am at my minimum of 5 positions--in which case I would replace the holding with a suitable candidate).
It is this way that I can shift my holdings in a fairly automatic fashion between cash and equities. This part appears to be working as I am now at 5 positions and the market environment is frightful.
Back to Graham.
My 105 shares of Graham (GHM) were purchased in my Trading Account at $64.48/share. With stock hitting $86, this represented a gain of $21.52 or 33.4% since purchase. This exceeded my 30% appreciation target yesterday, so this morning I sold 15 shares or 1/7th of my 105 shares, leaving me 90 shares which actually went ahead to move higher.
Ironically, I have now been handed a 'permission slip' to be adding a new positions. I didn't find anything 'suitable' today on the top % gainers list (where I start looking), and thus decided to continue to 'sit on my hands' with the proceeds.
That nickel is burning a hole in my pocket already and I shall be on the lookout tomorrow as well for something suitable for my portfolio.
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Comments: 8
I use Fidelity. The transaction costs are significant, but my performance has justified those relatively small costs.
Thanks for commenting!
I think it's good to have a strategy that moves you beyond emotion.
As you pointed out, transaction costs are far less significant than they used to be in the old days. I remember when a full-service broker could easily charge you $100 just to make a transaction.
Thank goodness for discount fees.
But still, one needs a system that both gives you an idea of when to get out of equities as well as get back in. That's the rub.
I am not sure how many "people" are using a systematic approach like this.
It seems to work for me.