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?
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....
ReplyDeleteI 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!
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.
ReplyDeleteA 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!