Question about % of your port given to a stock

[lovetobike]

I was wondering, what % of your portfolio are you willing to give to a stock or stocks in the same sector (e.g., buy 3 different companies in fertilizer)? And what is your reasoning?

I realize that it is important to diversify but sometimes if there is a run on a particular sector, is it worth the risk to put a larger allocation in those areas? What would you consider large? reasonable? small?

[Bluerobin]

Love, from time to time, I overweight on a sector. Then I watch it carefully. Fertilizer tends to move dramatically from what I see. Beware.

[rovo]

I'll probably catch some flack on this but I'm not opposed to holding up to 40% in one stock. I'm also not much on re-balancing just to reduce risk. Occasionally I'll re-evaluate and redistribute funds meaning I'll the non-performers but seldom, if ever, will I sell a winner if I think it has room to run.

[yclept]

lovetobike,
My position sizing strategy is more bottom-up than top-down.
I use a basic position size of $6000, which keeps my commission to 0.17% (each way) of the transaction. On very low liquidity stocks, sometimes I'll buy as little as $4000, but never less than that.
I usually make an initial buy of a single position. After that I add to holdings in tranches of the single position size.
I've been burned several times when I grew positions too large. For example, last year I had what turned out to be away too much of EGMI. When it went essentially to zero, it wiped out almost all the profits I made on all other transactions that year. As a result, I've made a new rule for myself that I won't hold more than 4 positions of any given stock -- for the size of my portfolios, $24,000 (4 positions) is a significant position, and as much as I'm willing to lose on a single ticker.
I usually don't have any trouble identifying stocks I want to buy when the market is in "buy" mode. When I see the market as in "sell" mode, I don't want to own anything (long).
The downside of this strategy is that I end up having a lot of positions to deal with (many of which are single positions, the $6000 size). I just handle them very mechanically. If they fall off the screen that picked them, I sell them, with few questions asked. I also keep a lot of well above-market limit sell orders in place. More often than not, when one of those high limit orders hits and I sell the stock, I'm able to buy it back a few days later at a significantly lower price (assuming it's still on the screen and I still want to own it).
My due diligence comes on the buy end of the transaction. I always check fundamental data for a new ticker showing up on the screens to be sure that some unusual event (like a buy-out offer) isn't unduly influencing the data on which the screen is making decisions. Sometimes I place a below market limit buy on new screen entrants rather than buying them outright. If I get filled, fine, if not, I can look at it again tomorrow to see if I want to buy at a higher value. These judgments are based on my evaluation of technical parameters.
I don't really have to worry about sector concentration. What I want to avoid is the catastrophic collapses that are always specific to awful news about a given company. I seldom end up with a lot of tickers in the same sector anyway. Since it's not part of my "buy" selection process, the screens seldom pull very many stocks in the same sector.
Rovo,
Consider yourself having caught some flack. Risk abounds, regardless of the company. I'm sure there were plenty of people with high concentrations of BP on April 19th (the day before Deep-water Horizon blew) who would have a bit of advice about how many eggs should be put in one basket.
What if people stop dying? What's that going to do to your HI? What if some new Ford hybrids begin to electrocute drivers who touch the doorknob at the same time as they touch the ignition? I reckon that would really hurt the F -- but would help the HI! What if there's a big flood in eastern Australia? I reckon that would hurt some stock or other.

[rovo]

Yclept: "What if people stop dying? What's that going to do to your HI?"

Forget HI, what is it going to do to Social Security? I think the HI is safe from your comment but more and more are choosing cremation and this is hurting HI. I also believe this is why they are trying to diversify into other business areas.

I fully understand how holding a limited number of stocks could be dangerous. I guess I'm just a "wild and crazy guy".

[lovetobike]

I'm in need of some advice. I think the best way to grow my money for my situation is to invest it. I have no desire to build a business, I'm in a stable job that has excellent retirement contributions, health care, and with both of DH and my salaries, we are able to put an extra 2-3K of our salaries into stock market investments. We fully fund our Roth IRAS - I've been doing that since 2000, DH since 09. We each have our own accounts and are managing them separately but discuss our buys/sells etc. I've only been investing my own stocks since April 09 and DH started 4 months ago. As you can see, we are both new at this.

What I think my problem is: I really don't like to lose money and so I'm investing small amounts into the individual stocks I've purchased. Call it beginners luck, the market was so bad when I started investing in individual stocks that any dummy could have made money this past year, or some smart choices, I've managed to make money on the stocks that I have in the stock market. I'm afraid to have really large positions - my largest for one stock is 7% and for a sector of stocks (fertilizer) - 14%. My problem, is I've held most of my money in cash where it is doing nothing. I'm 38 years old and so I have time to take more risk...but it bugs me to lose money. I've gotten better at dealing with it over the years because I recognize that to make the best gains in the stock market, there are times that money will be lost.

So, back in '09, I sold a much of my mutual funds that had been started when I was 11 years old and contributing to from the money I made during the summers throughout college (my parents were able to pay for education and so I took my extra money and told my dad to put it in those mutual funds). Unfortunately during the market fall out in '08-'09 I watched those values go down, down, down, got sick of it and sold at one of the lowest points of the market. I started out with $66K to invest in individual stock funds. (BTW: I don't sell at the lowest point anymore, I've learned out to wait it out I've grown that value since then - part of it is from gains in stocks and some is the money that has been added from extra money from my paychecks and other sources.

Which leads me to the point below:

My father has been giving me inheritance money every year to avoid the inheritance taxes that I would have to pay at time of his or my mothers death. They are both healthy and doing well, my dad is just thinking ahead. I just received another check and so I'll add it to my investment account and I'm sure it will sit in cash and I try to figure out what to do with it. I'm already in 37% cash right now. That value will go up once I deposit this contribution.

Another problem for me: I'm not using my time wisely at researching stocks. I've got the books on my shelf to read - Graham's value investing is a tough read. I'm learning from this board but it still takes time to figure all of this out and manage it. I'm really busy at work right now and so my time is limited - at times I find myself using work time to monitor some stocks especially if the market is taking wild swings and I'm needed to make a decision to sell a stock I'd planned to have in a short term trade. I guess that is where deciding on a target price, putting the sell order in and forgetting about it would help.

I know Beerfan posted a note about using his $$ to build his career or stocks portfolio - my case is a little different. I won't see significant advances in my salary with extra work or training put towards my job. I chose this job knowing that -- I decided that my quality of life was worth more that making huge sums of money. I get 6 weeks off in the summer -- 12 if I chose not to make extra $$ teaching summer school. Who can beat that?

So, given my situation, I'm wondering, would I be better off to put my cash in a growth dividend paying ETF like Vanguards VIG and at least let it earn a dividend and get some some growth while I'm trying to figure out what stocks I want to invest in? The market seems pretty stable right now with the potential for some small corrections but nothing like the drops we've seen in '08/'09.

Or, should I designate some solid large cap companies with nice paying dividends (JNJ, PEP, etc) and put the money there to earn dividends, some growth, and then when I find a stock I want to buy use those $$ to buy it?

Or should I think a different option? It just seems that right now it is silly to have this much $$ in cash at my age while I'm learning about selecting stocks etc.

[rovo]

There is risk associated with every option in the investing world. Even the parking of money in CDs has the risk of losing buying power. Dividend payers sound good but what if you get a 3% return and the stock declines 5%? Only you know how much risk is acceptable to you.

I do know the only way to make your money grow is through investing it. You have time on your side and need to make your money work as hard as you work.

Timing the market on a macro scale is not very difficult as the market tends to change direction slowly. The problem isn't in deciding when to switch course but is in actually doing it. This is why several of the posters on this board use "mechanical" methods to switch in/out of stocks. I too have been guilty of ignoring the indicators and watching the portfolio decline.

[bimetalaupt]

Jan 9, 2011 14:05:37 GMT -5 rovo said:

There is risk associated with every option in the investing world. Even the parking of money in CDs has the risk of losing buying power. Dividend payers sound good but what if you get a 3% return and the stock declines 5%? Only you know how much risk is acceptable to you.

I do know the only way to make your money grow is through investing it. You have time on your side and need to make your money work as hard as you work.

Timing the market on a macro scale is not very difficult as the market tends to change direction slowly. The problem isn't in deciding when to switch course but is in actually doing it. This is why several of the posters on this board use "mechanical" methods to switch in/out of stocks. I too have been guilty of ignoring the indicators and watching the portfolio decline.

Rovo,
The concept that is used more and more on risk is "Value at risk". Simple this is trhe
SD for a period times value at start of period.
so if your investment is worth $1000 one Jan 1,2011
If the Standard Deviatilon is 10%
Your current Value at risk would be $100 for 2011!!
That is the reason for keeping Mutually Exclusive investments
Just a thought,
Bruce

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[mesquite77]

My limit is 4% of my NW for one position. Although right now for my favorite stock, I'm selling 250 shares each time the price hits where my remaining shares make up 4% of my NW.

[IPAfan]

I think with upwards of $70,000 that you should pick an investment strategy in individual stocks that works best for you. If you like the idea of VIG (buying dividend growth companies), just invest in dividend growth companies that you would plan on holding long term (unless the fundamentals change dramatically.)

Think PM, MO, MCD, JNJ, KO, ABT, etc. Solid blue chips.

Or start using a mechanical investment formula like magic formula investing. Pick 20 small caps and 20 large caps and rebalance every year. You should probably outperform the market substantially there.

Or you could do the foolish thing (like me) and stake most of your investments on your favorite pony. My favorite pony is usually one that has a large amount of cash on the balance sheet, no debt, and good ROE. Like Yclept, I got burned on EGMI...some companies have fundamental that look good.

The rule I've learned from EGMI and PSTR is never to make a concentrated investment unless you've got management and a business model that have been proven over the long term. I've made some big gains, and also had big losses on some of the more speculative investments (even the ones that are cheap by Graham standards) That's fine if you invest like Graham who would often have hundreds of positions at a time. If you shop just by statistical bargains, it's better to buy more rather than less to smooth out the volatility.

Still, a concentrated investment in a company like Fairfax financial, Phillip Morris, Berkshire Hathaway, Leukadia, etc. would have been a really good move at almost any time. I'd like to try to find companies that can grow at a very healthy rate, and then buy as much as I can and hold on.

[Deleted]

My general rule of thumb is no more than 10% of NW in any particular one investment including my house. I laughed when I read the post about BP because that's the example I thought of as well. You think you have a solid company and boom!, the universe decides to make you humble.

That said, we are probably going to pay off the house we're going to move to in 18 months and that property represents about 20% of our NW. We'll need to live with that decision for about 7 years until we sell it. It's in the Bay Area so the values are o.k. but I'm thinking about buying earthquake insurance for the first time in 20 years!