Wednesday, July 17, 2013

Addition to investment mistakes & to the rules

mistakes leads to desert

For a long time I have been thinking about how to deal with drops in stock prices of stocks that I already own. I was previously thinking about that when it drops 30% or 40% or whatever specific number then I should step in and buy more stocks. I have also done this pretty consistently in the past year which caused two things to occur:

1. I was not able to buy new interesting stocks that I actually wanted
2. They continued even further down

I will therefore add this issue as a running mistake for 2013.

The new suggestion for investment rules will therefore be... no matter how far it drops unless they are showing a quarter or half year report with good results I will not buy more of the stock. True I will miss some of upside but then at least the company is back on their feet when I step in with
more money again.

I hope this adjustment will improve my investment strategy.

What are your rules? Do you think this is a good addition for me?


Andras said...

Hi Fredrik. I discovered your blog during my research on Kernel Holding. Congratulations for this, I wouldn't have patience to continuously write all my experiences....

I show many similarities with you in investing: also recently started (2011 April), am a non-professional investor, even the magnitude of my capital/investments are in the ballpark...

My advise to you (that's what I do at least) is to define a Target price as well as a Stop loss level when investing into a company. This enables you to at least 3 things:
1) calculate the risk-reward ratio (my enter criteria is min. 1:2)
2) step out "in time" if the stock starts falling
3) divest, or - what I usually do - increase the stop loss level, when the price reaches your defined target level

I learnt that if a stock price suffer a certain % drop an investor has to draw the conclusion and close the position (and bear the loss). I think this is what Warren Buffet was referring to when saying not to lose (much) money. I found it very hard to decide about closing a bad performing position, without previously pre-defining my stop-loss level. Hope it helps.

Good luck buddy!

Fredrik von Oberhausen said...

Thank you for your useful and interesting comment! Nice to hear that you found this blog due to Kernel because I will try to make a short new article concerning them tomorrow due to the report that they published today.

A target price I actually have for the stocks I own which is based on their "motivated" P/E value with a slight downward adjustment as safety margin. Therefore it is good that you mentioned it because I will try to implement that in my monthly stock portfolio report. Thanks!

The stop-loss I find more difficult because it means to admit that the choice was bad from the start (because one must create the stop-loss rule even before buying) which I think that I am currently not a good enough investor and/or person to do. But I will try to work on that part to become more humble and less stubborn.

I also do not like that with my deposit provider to put up a one month stop-loss orders then I have to pay 4.5€ if not used and if used then I pay 10€. So it would currently be 40.5€ each month for my nine stocks. However to admit the loss and sell the stocks even the day after the big drop without using the providers stop-loss orders is of course possible. I don´t know... I really find it hard. I will think about it and see how I do with the stop-loss.

Thank you once again for your excellent comment!