Changing Lot Size

[buzz]

Sol, All,

I sold my investment property and plan to invest this money in the market. I live in California and just sold a condo for $20k more than the appraisal price. It is just stupid what people are paying to get into real estate and I don't think it will last. It took ~10 years for California real estate years to recover from the 2007 crash. The challenge I am coming to grips with is following the TI rules. I reviewed the guidelines for lot size and understand them. I even see the guidance for what to do if you 'come into more cash' ...

If you come into more cash, say another 20K, you can either divide equally into the 10 existing parts of 10K or you can create another 2 new parts or position of 10K, so now you would have a total of 12 cash positions each equally 10K.

With the sale of the property, my investment account balance has gone from 150k to 600k. So lot size should go from 5k to 20k.

My challenge is with this guidance ... "Allocate the same amount of funds to each position" and "There Is No Place for Emotions In The Market". If I bump my lot size on the next purchase by 4x, how do I avoid getting emotionally attached when it will be a much larger than prior purchases. I am thinking of slowing raising my lot size, though I am concerned my emotional attachment will go up with each purchase.

Indeed this is a good problem to have. I am looking for advice on the approach. Perhaps there is something easy that I am not seeing. The advice on the forum has been great, so I appreciate the feedback.


Buzz

[Eric]

That's a heck of a good problem to have.

I tried making my "lots" 3% of my portfolio size so each fill was approximately 1% of my portfolio balance. I had a hard time getting enough fills to use up my cash so I switched to 4.5% "lots" so each fill is ~1.5% of portfolio balance. If you used 1.5% fills it wouldn't be 4x larger lots, it would be only 1.8x larger.

[Yodean]

@buzz: there are many different ways to adapt the TI recommendations to suit your needs. Eric has written fairly extensively on this and if you go through his past posts you will find a lot of reasonable suggestions with embedded mathematical examples.

Another consideration is that 2nd and 3rd lots do not get filled that often, so you could try a slightly different scheme. For example, if a full position for you is $60k, instead of three lots of $20k each, you could do 1st lot = 30k, 2nd lot = 20k, and 3rd lot = 10k. This reduces the damage from potentially catching "falling daggers," and also leans you away from holding too much cash in a primary bull market. Of course, one potential disadvantage of this approach is if all three lots are filled for a particular position, your average entry price will be higher.

With respect to wanting to increase your lot sizes because of extra funds, in order to emotionally be at peace with yourself, you could simply tell yourself that starting with the May issue of MU, you will start deploying the bigger lot sizes. Also, if there are old plays that are still within TI's entry points, you could fill those up to the new lot sizes. This way you avoid second-guessing yourself.

[ultramartian]

There is also a problem of how many positions you planned to hold but found out you did not have enough cash left to keep up the new recommended plays. I currently hold 29 positions from both MU and AI services plus several unofficial plays, and I am less than 10% cash reserve now. If the MOAB or FOAB ever triggers, I won't have enough cash to capitalize on it.

[Eric]

If the MOAB or FOAB ever triggers, I won't have enough cash to capitalize on it.

Hopefully there will be recognizable signals before that happens so you can close out a bunch of green positions and have working capital when it happens.

On February 20th, 2020 I recognized the "COVID-crash" was going to get a lot deeper and sold everything I had that was green (showing gains), I held all the red for the recovery... (Of course I didn't capitalize on the recovery as well as I should have because I was too damn busy working at getting everyone else working from home--my next buy was July 9th.)

[buzz]

Thanks all, I am going bump up the lot size by 2.5x for new entries. That will give me room to get into more plays and should still feel comfortable (though its the most I have invested in a single stock). If MJ and HA are still in play tomorrow, I will start with them. This will also give room play the AI picks and get into the 'hellfire' (or whatever it will be called) list.

[Eric]

Are you targeting a specific number of positions? I generally have 40-50 positions in my IRA (MU+some of my own), another 10-20 in my 401k (AI), and 1-10 in my taxable account.

[Yodean]

On February 20th, 2020 I recognized the "COVID-crash" was going to get a lot deeper and sold everything ...

I'm curious - how did you recognize that the Feb. 20/20 drop was going to get deeper at that time? Gut instincts/spidey-sense or do you have a specific methodology or way of looking at the markets? Could be a handy skill.

I'm wondering about an intermediate top followed by minor correction in early May or so . . .

[SOL]

We only focus on the opportunity factor, for those that panic or sell have a hard time knowing when to jump in. Fear overules logic. BE FEROCIOUS IN THE FACE OF PANIC

[buzz]

@eric - I do not have a specific target. I currently have about 20 positions between MU/AI and my own picks. I will probably bump that up to ~30, with some of my losers being replace with TI trades.

[Eric]

On February 20th, 2020 I recognized the "COVID-crash" was going to get a lot deeper and sold everything ...

I'm curious - how did you recognize that the Feb. 20/20 drop was going to get deeper at that time? Gut instincts/spidey-sense or do you have a specific methodology or way of looking at the markets? Could be a handy skill.

I'm wondering about an intermediate top followed by minor correction in early May or so . . .

If the entire world starts talking about doing national lockdowns and "switching off the economy" in late April then go ahead and sell everything before the early May bottom.

[ultramartian]

--my next buy was July 9th.)

That's a little bit too late...

[Eric]

--my next buy was July 9th.)

That's a little bit too late...

Yeah, I know. I was working 60-70 hour weeks at work with typically 4.5 hours of lawn mowing on the weekend (I have a lot of grass) and having a baby turn two in that time. I think that was probably a once-in-a-lifetime isht-storm but if there is a "next time" I won't let all the other BS get in the way of my financial future like that.

[Yodean]

If the entire world starts talking about doing national lockdowns and "switching off the economy" in late April then go ahead and sell everything before the early May bottom.

I never place complete faith in any single prediction, no matter who makes it - not even Jesus of Nazareth.

I see everything as existing in waves of probability, not certainty. So I am always invested as it appears we are still in a primary degree bull trend . . . it's just a matter of how much cash reserves to hold, and how much to allocate to high-risk assets vs. blue chips, etc.

I do think there will be a significant correction at some point this year, and it will represent a buying opportunity, but one must have a significant cash allocation to take full advantage. Nothing to do with fear. I had seven-figure USD realized gains in 2020 alone, and had several years in the last two decades or so when I lost significant six-figures, so I am no stranger to big swings in the markets.

My original question was whether you had any insight or unique way of estimating or guessing about the probability that we are approaching an intermediate top, that is all, since you mentioned you felt the crash happening in Feb. 2020.

[SOL]

--my next buy was July 9th.)

That's a little bit too late...

Well yes and no depending on one's perspective. If one focuses on the trend and does not obsses abuout hitting homeuns, then there are sectors that always experience backbreaking crashes that can mimic a general market crash. One the looks for the top plays in those sectors and one can in theory bank gains that will match those that were made when we jumped in and opened positions during the COVID crash

What one should understand about any crash going forward is that the stronger the correction the better the opportunity. Be ferocious when others are wary and back the truck up when the crowd stampedes.