Bail Out in good portfolio management Plan?

[Centeron631]

Under the coded information titled TI says: 'One of the most important aspects of portfolio management is to invest equal sums of money into each position and decide how much you are willing to lose in advance.'

Kiplinger states: investing legend Philip Fisher wrote decades ago in Common Stocks and Uncommon Profits: "More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason."
Selling tips. Given the potential pitfalls, what can you do to improve your chances of selling successfully? A mental exercise we've found useful to combat psychological stumbling blocks is to imagine being forced to liquidate your portfolio and start over from scratch. Which stocks would you buy, and how much of each would you own? Then compare this hypothetical new portfolio with your current one. If there are stocks in your current portfolio you wouldn't buy today, ask yourself why on earth you're holding them at all.

Also critical to knowing when to sell is keeping an up-to-date estimate of what you believe a stock is worth. But don't focus on that value relative to what you paid for the stock. Instead, consider it in relation to the price at which it currently trades. (If you bought something at $30, you believe it's worth $55, and the stock trades today at $50, you need to ask yourself whether capital devoted to a company with an expected upside potential of 10% might be better invested in something with a much higher expected return. If the answer is yes, it's time to sell) -a bit of an aside as deals with upside but important too i suppose.

Finally, always remember why you bought in the first place, as different types of ideas can expire at different times. Three examples ............. https://www.kiplinger.com/article/inves ... picks.html

Why do i bing this up now? ive sat for quite awhile now with some 4-5stock investments over 40 to 72% loss (not to mention some leaps 60 -70%loss) and yet i do not have a bail out plan not that have i seen it mentioned much in Ti except for above statement (not mentioned in recent update where TI gave examples of 2 long term portfolio management plan). Do i still chase the 3rd level after being decimated on first 2 levels? would not i be better off puting that money into a newco? these r the questions in my mind - should i have had a plan to bail out at any time somewhere between 40 to 50 % down no matter where TI is in suggesting another level yet (and i must say ive wondered if there is a possible bias concsious or unconscious to average down the entry price). Do u have a Bail Out Plan as part of your portfolio investment strategy???

[Eric]

If there is a yet unrealized third level the point of bailout has not been reached. My automatic bailout is only for profitable positions...

[harryg]

Insofar as your question relates to TI plays, I'll let someone else answer.

In general terms, people have varying approaches or philosophies, call them what you will. The secret of the markets, if there is one, is to know what works for you.

For this reason I would suggest, and this might appear to be condescending but I can assure you that it is not intended that way, that you continue work on your own best approach. The book you mention is a good one for some basic structure. Remember that everyone has a different opinion - if that were not the case, there would be no market.

To address your questions, and I'm not referring to TI picks here, I think it comes down to what one is comfortable with and the general investing style. The below is a simplification.

Speaking for myself, risk management is paramount and letting losses get out of hand is not A Good Thing. This is probably because I have a background in futures trading where one can get wiped out in short order. So I have always been quite strict with losses. Psychologically I don’t like them, mathematically I don’t like them (a 75% loser has to quadruple just to get back where it was), and frankly I don’t see the point in hanging onto a loser hoping that it will get better when there is a universe of exciting shares out there.

The excerpt that you post about people hanging onto losers* hoping for breakeven is a psychological ploy only. It's often a way of protecting ego at the potential risk of losing 100%.

This is not to suggest that I don’t have any losers (!!!) Bonjour, Canopy Growth. However, any plan to purchase more at lower prices would be predicated on perceived value at the new entry point, and absolutely not to reduce the ‘average price’. That, in my view, is a psychological nonsense.

I usually have a stop @ 50% (variable for risky or small plays - normally I won't let it get to 50%). I prefer the discipline of being stopped out and then deciding whether or not to get back in. I find also, from experience, that a 50% drop suggests that my original opinion should be reassessed.

Someone else could have an entirely different approach.


*To give a full response one would now have to classify a loser, which could be another subject all to itself. That is not as simple as a % share price drop because sometimes good shares get hammered badly for no apparent reason, which would make for a good opportunity. This seems to be happening more...

[Centeron631]

to Sol et al

Yes thank u for ur insite Harryg, quite helpull

In paticular i am hoping Sol to elaborate on the underlined words as to exactly what he intends there as i have not seen it discussed in any of the blog or updates but just here in this portfolio management info area that he is always encouraging us to visit. Also hoping he will comment in conjunction with the rest of the points raised.

[SOL]

If there is a yet unrealized third level the point of bailout has not been reached. My automatic bailout is only for profitable positions...

Harry made some good comments and it seems he has found a level of risk to reward that resonates with him. Eric is on the right track in terms of our trading methodology. If there is 2nd and third entry point then in over 90% of the cases the bailout point has not been reached. If you look at many of the positions we had during the covid crash, quite a few were down over 50% from the 1st entry point. This is why we deploy 1 lot at a time. It's not to average down because averaging down for the sake of lowering your entry point is generally suicide. It's because we know the markets are getting more and more volatile and as a result some stocks sometimes can shed 40% and as much as 60% though generally, it is much lower from the 1st entry point. So the game plan to deal with stocks that are in an uptrend is to deploy one lot at a time. We have been using this strategy for 19 years now., and if one examines the historical results one will see it works. Obviously, volatility levels are much higher now and that is why we divided the lots into 4

If individuals follow the suggested strategies for beginners that's discussed in the suggested reading material one would see that we strongly advise against getting into higher-risk plays unless one has extra capital, a higher risk threshold or more importantly is deploying profits into higher risk trades.

If you have 10K and 20 positions are mentioned you don't have to get into all 20. You can select 10 or less that appeal to you and invest in those, when you close out a position you can use that money to open a new one.

We will be adding more articles that will cover the following topics
The best time to be very aggressive, the best time to be conservative, etc. However, no amount of extra information will change the equation if the principles discussed in the first three articles is ignored.


Every single person should read the suggested 3 articles; the more the better so that they understand our trading methodology.

[bpcw]

Very good reply Sol!

I also think what is missing is overall portfolio management, in other words, cash to invested levels. It is obvious that approaching the 3rd quarter we should be raising more cash whilst keeping an eye on sentiment readings, once the masses start getting bullish and excited we need to have I would suggest at least 50% cash and there's nothing wrong in being 100% cash waiting patiently for a severe correction. Would you consider adding general advice to this effect, doesn't have to be exact percentages as that will be down to individual strategies but to reccomend raising cash levels or being more aggressive would be helpful I believe.

Perhaps this is for the individual to discern from the updates and that's fine if so. I would add that personally I was mainly in cash before the covid correction and did very well out of it but was too invested before the current correction as I wasn't expecting it so soon so will be pleased to get to my previous high before the likely correction later in the year.

[SOL]

Very good reply Sol!

I also think what is missing is overall portfolio management, in other words, cash to invested levels. It is obvious that approaching the 3rd quarter we should be raising more cash whilst keeping an eye on sentiment readings, once the masses start getting bullish and excited we need to have I would suggest at least 50% cash and there's nothing wrong in being 100% cash waiting patiently for a severe correction. Would you consider adding general advice to this effect, doesn't have to be exact percentages as that will be down to individual strategies but to reccomend raising cash levels or being more aggressive would be helpful I believe.

Perhaps this is for the individual to discern from the updates and that's fine if so. I would add that personally I was mainly in cash before the covid correction and did very well out of it but was too invested before the current correction as I wasn't expecting it so soon so will be pleased to get to my previous high before the likely correction later in the year.

for the record there is an article titled portfolio management in the passcoded section. However, let me give you an example and then provide some other details.

All of us behind TI can be very aggressive at times. However, we understand that when we enter into the aggressive mode, we can see drawdowns in excess of 50% from our first entry. This is not the point of the story. No matter how aggressive anyone is. Look at the risk profiles below. One should always build their cash back to the amounts that match with their risk profiles.

One very random example of our strategy and methodology in play. We got into a very high-risk stock. We could not make it known to everyone as the volume was just too thin and one person could have become the market on any given day, that's how thin the volume was on certain days. This play was very high risk (not just high risk). On an intra-day basis, the stock traded as low as 90% from our first entry point, now that is what you call a serious drawdown. When it shed its weight it was not in one easy smooth swing. It was a rapid sudden bone-breaking drop. As we stated this stock was very thinly traded so some big sharks were having their way and forcing the small guys out, however, the trend was up, and so when this happened we deployed the remaining three lots (we had divided our lots in 4 as this was a very high-risk play) and dramatically reduced our entry price. Within a week the stock was trading 50% higher which would have meant nothing if we had not deployed the other three lots, now from a possible loss of 90%, we were only down roughly 38%. 9 months later we closed the position out for a gain of 70%. What did we do, we moved this entire amount into cash as our cash position at the time was 16%. We are not advocating taking on high risk, we are suggesting that even with high risk plays there is a way out if one has a plan and one is getting into the play based on trends and not emotions. We also did not allocate an insane amount of money to this stock. No matter how good an investment looks, never over-allocate funds to it.



Here is a very simple general formula, which can be adjusted to suit one's needs

Find your risk threshold and choose a profit target for a least half your position. It can be 30, 40, 50% profit targets, but be consistent. On the monthly cycles, when a market is trading from the extremely oversold to the natural ranges, one can remain aggressive. Once the market moves out of the neutral zone, be more vigilant and allocate more to your cash position. One way to do this is to say okay my normal investment lot size is 3K, I am going to reduce it to 2K and divide the 2K into 3 lots. Once the market hits the overbought ranges you can reduce the lot size even more or invest in fewer stocks and bank profits at a faster clip. The largest gains generally come during the first part of the move and the tail end of the move.

While I am providing some new variants above, we have always advocated taking profits from the table on a consistent basis; This is discussed in the suggested articles listed in the passcoded section of the website.

Here are some general suggestions for how much cash one should maintain. Suggested Cash ranges that can be modified

Low-risk individuals a minimum of 25% during good times which can be dropped to 10% during a MOAB or even as low as 5% if a FOAB is triggered. However, once the profits start to roll in take the money of the table to bring your cash allocation to 25% again. When a market is trading in the extremely overbought ranges, cash allocation can be raised to as high as 65% but you need to be disciplined because you might end up waiting for up to 1 year, though the wait time keeps dropping

Medium Risk-takers

Under normal time Cash portfolio should not drop below 20%. If a MOAB and FOAB are triggered it can drop slightly below 5%, but then as the profits roll in, take some off the table to build up your cash position again. When markets are extremely overbought cash position can be as high as 60%

High-risk players
Under normal times 10% or should be kept in cash. If a MOAB is triggered one can deploy 100% of one's cash. As profits roll build up cashback to 10%. When markets are trading in the extremely overbought ranges, cash portfolios can be in the 45 to 50 per cent ranges.


Ultra-high Risk players (Cannon-ballers)

The primary prerequisite is not guts but brains and discipline. These players can be zero per cent in cash but it should be done gradually and only when the market is trading in the extreme to insanely oversold ranges on the monthly charts. After that, they should start to raise cash.

If a MOAB or FOAB is generated, these players can use a margin, (100 per cent cash plus up to 100% margin depending on your earning power. You should always be in a position to pay back everything you borrowed if push comes to shove). How much margin you use should always be based on your ability to pay it back.

Once profits roll in, reduce margin step by step until it's zero. Now let the profits roll until the markets are trading in the slightly overbought ranges, then raise your cash portfolio up to 20%. when the markets are trading in the extremely overbought ranges in the monthly charts, raise your cash portfolio up to 65%. Why would we suggest this for individuals willing to take on so much risk? Well, these guys are extreme risk-takers and generally very disciplined and patient. When the markets drop they will have extra amounts of cash to deploy into the stocks as we won't always get a MOAB. If any MOAB is not triggered but the markets are trading n the insanely Oversold ranges on the monthly charts up to 50% of the margin can be used


These are general rules that one should modify to suit their needs. The stock example I gave earlier illustrates that all the members at TI can take on insane amounts of risk much higher than the average person, but we are not insane to ignore portfolio management rules. . Without portfolio management, we would have been blown out of the water a long time ago and this can happen to anyone even the best of the best. Portfolio management is essential to a long healthy investment life.

More importantly, we don't expect to win on every high-risk play we get into. We go into high risk plays knowing that potentially we could lose it all, though that has not happened to date. The higher the risk the higher the potential for loss, but the potential to bank serious gains also rises enormously. Our worst option losing streak was I think almost 9 option losses in a row. losses ranged from 30 to 90%. Suddenly things turned around we had 4 back to wins of 400%. And a series of several other wins in the 100 to 200 ranges and just like that we were deeply in the black again.

[bpcw]

Excellent reply Sol.

I've mainly followed this approach of going in more aggressively as the markets correct and selling into rallies, I think what has happened this time is a lot of the stocks we traded in have corrected quite severely and so we've allocated more 2nd and 3rd lots, plus I decided to go into TI stock suggestions rather than geared ETFs as volatility was rising, this coupled with the stock indices not following the same trend as a lot of the plays and not many plays have had enough profits to bank. All this has meant I've exhausted my cash levels. Having said that as the markets bounce back I am on a good position to at least get back to my previous high and potentially new highs. Just would have been even better to have more cash going into this correction. I did sell some plays with low upside potential and have some cash now to redeploy now we're getting to the bottom of this current correction.

Hey, you live and learn and can't win em all!

[sumantra]

Hi Sol - for high-risk traders, you said: "When markets are trading in the extremely overbought ranges, cash portfolios can be in the 45 to 50 per cent ranges."

I am assuming that the "extremely overbought ranges" here refers to the monthly charts and not the weekly charts?

If so, the latest Feb 17 Market Update had said "All the major indices are trading in the highly or insanely overbought ranges on the monthly charts." It also said "Conversely, all those indices are trading in the extreme to insanely oversold ranges on the weekly charts."

Assuming the extremely overbought ranges in your first quote above indeed refers to monthly and not weekly charts, I assume then that a high-risk trader should be looking to have cash portfolios of around 45 - 50% right now, correct? Even though the indices are trading in the extreme to insanely oversold ranges on the weekly charts?

Just want to make sure that I am not confused - i.e. that the target cash portfolio % should depend only on the monthly charts and should not be influenced in any way by the weekly charts.

Thank you.

[Yodean]

If so, the latest Feb 17 Market Update had said "All the major indices are trading in the highly or insanely overbought ranges on the monthly charts." It also said "Conversely, all those indices are trading in the extreme to insanely oversold ranges on the weekly charts."

Assuming the extremely overbought ranges in your first quote above indeed refers to monthly and not weekly charts, I assume then that a high-risk trader should be looking to have cash portfolios of around 45 - 50% right now, correct? Even though the indices are trading in the extreme to insanely oversold ranges on the weekly charts?

Just want to make sure that I am not confused - i.e. that the target cash portfolio % should depend only on the monthly charts and should not be influenced in any way by the weekly charts.

My 2c:

What Sol wrote are general guidelines. We're in somewhat unusual times. To me, my base case is we're hitting some sort of interim bottom now or next week, so I've been buying a lot, to the point I'm even using a tiny amount of margin for the first time (I still always keep about 5 months of living expenses in cash, no matter what). Besides charts, I use direct sentiment measures, the volatility index, and a few other indicators to gauge where the markets are at. Then of course, you want to look at the specific chart-sentiment pattern of the actual stock you're accumulating.

Also, in general, if one has less than 5 - 10 years of experience successfully trading the markets, I would use Sol's categories to decide which risk category one belongs to, then go down one risk category. I.e. if you think you are a "high-risk" player, follow the guidelines for "medium-risk" players.

Most beginning and even intermediate investors overestimate their downside risk tolerance.

Another way of saying this is, "everyone's got a plan until she gets punched in the face."

[SOL]

Hi Sol - for high-risk traders, you said: "When markets are trading in the extremely overbought ranges, cash portfolios can be in the 45 to 50 per cent ranges."

I am assuming that the "extremely overbought ranges" here refers to the monthly charts and not the weekly charts?

If so, the latest Feb 17 Market Update had said "All the major indices are trading in the highly or insanely overbought ranges on the monthly charts." It also said "Conversely, all those indices are trading in the extreme to insanely oversold ranges on the weekly charts."

Assuming the extremely overbought ranges in your first quote above indeed refers to monthly and not weekly charts, I assume then that a high-risk trader should be looking to have cash portfolios of around 45 - 50% right now, correct? Even though the indices are trading in the extreme to insanely oversold ranges on the weekly charts?

Just want to make sure that I am not confused - i.e. that the target cash portfolio % should depend only on the monthly charts and should not be influenced in any way by the weekly charts.

Thank you.

Yodean is right these are general instructions and I pretty much wrote them up almost on the same day when BPCW asked for more guidance re how much cash one should have. However, one important part is that sentiment has to be taken into consideration when putting this strategy into play. So the market should be trading in the extremely overbought ranges on the monthly chart and bullish sentiment should be high. Current bullish readings are in the extreme zone.

[SOL]

My 2c:

What Sol wrote are general guidelines. We're in somewhat unusual times. To me, my base case is we're hitting some sort of interim bottom now or next week, so I've been buying a lot, to the point I'm even using a tiny amount of margin for the first time (I still always keep about 5 months of living expenses in cash, no matter what). Besides charts, I use direct sentiment measures, the volatility index, and a few other indicators to gauge where the markets are at. Then of course, you want to look at the specific chart-sentiment pattern of the actual stock you're accumulating.

Also, in general, if one has less than 5 - 10 years of experience successfully trading the markets, I would use Sol's categories to decide which risk category one belongs to, then go down one risk category. I.e. if you think you are a "high-risk" player, follow the guidelines for "medium-risk" players.

Most beginning and even intermediate investors overestimate their downside risk tolerance.

Another way of saying this is, "everyone's got a plan until she gets punched in the face."

The situation is extremely unusual at this stage of the game. The Russian- Ukraine issue was pushed to the limit even when without the rhetoric it's a blip on the horizon. It's the rhetoric from the US and the EU that has made a molehill appear to be a mountain. The main reason for this is that the COVID effect is waning out. The fact that these guys moved so fast and in such an extreme manner illustrates that they are not going to give the masses much of a reprieve. As one event (fake disaster) loses its impact they will look for another to push. This development also suggests that they are hellbent on printing as much money as possible and the only way to do this is to create the illusion of instability.

2022 is set to be a trying year, up and then down and then up and then down again. An intermediate bottom will probably take hold shortly. Strong stocks will bottom before the indices. The Dow could potentially test the 31330 to 31,600 ranges. The only reason to do this is that a lot of experts were calling for the Fed to be aggressive. The current action in the markets which will be followed by many gloom and doom articles will give the Fed the power it needs to say it needs to focus on stability as opposed to inflation. Inflation will also suddenly vanish (at least the bastardized version of inflation that the Fed uses) and this will provide even more firepower for the Fed to scale back.

[MarkD]

As your team knows, I have been buying the dips. My one concern is that I am nearly out of buying capital. For those who are worried, every project I ever worked on in my career was funded. Try to find an engineer who can say that. EVERY.

My take is my Midas touch will result in a yuuuugggge rebound any day now!

[Yodean]

If a MOAB or FOAB is generated, these players can use a margin, (100 per cent cash plus up to 100% margin depending on your earning power.

Quick question for all TIT subs who are using margin currently or have used margin previously: what are you being charged, in terms of interest rate, on the margin you are using?

Thanks in advance for your assistance.

[nicolas]

With IB, it's between 0.83 and 1.83% depending on the size of the account:

Hard to beat. Source: https://www.interactivebrokers.com/en/index.php?f=46376

With TD Ameritrade, it's around 8%: https://www.tdameritrade.com/pricing/ma ... rates.html