Sunday, December 13, 2009

Learning to be an Astronaut

It's not enough to find a stock in which to take a position, but it is also important to manage the position. The literature tells us to keep our losses small and let our winners run. Sound advice. However, when faced with a loss, our head often counsels this way: "If you (as if there's a two-party conversation!) hold onto this stock, it will come back!" Conversely, when faced with a gain our head (again thinking that it is apart from us!), has equally pathetic counsel: "Better to sell it know what they say, 'nobody goes broke pocketing a gain.' Besides you big dummy look at those losers in your portfolio--be quick before this turns into one of those. "

It's worth remembering that your mind really doesn't have a mind of its own. And you can go broke by failing to take a gain. How? Simply by hanging onto your losers while tripping up your winners after they've made it through the first turn on their track to unknown price heights.

Let's take a look at one of my winning horses, HPJ. I had a 97% gain on this stock. And the stock lingered a wee bit too long (to my eye) for a follow through in volume. Plus, it was a volatility play, and selling into the volatility break out is part of the strategy. But rather than selling all, I could have done it more deliberately. Here's the chart (sigh!).

So selling was fine (more on that later). Re-buying after it comes back in is part of the strategy too. I did not do that. I passed on not one but two low volume pullbacks.

It is important to differentiate between hindsight bias and transforming 'coulda, woulda, shoulda's' into learning vehicles. What would my learning be from this trip down memory lane? What would I have done differently?

  • On first volatility breakout, sell 1/2 position.
  • On subsequent pullback, add to the position--now full position.
  • On second breakout, I would have sold 1/2 position again, and looked for another entry. As you can see from the chart, that is what some other eyeballs were looking for.
  • I would have sold 2 of 3 tranches into the melt up and kept 1/3 position.
Now plenty of folks keep buying into these melt ups. My DNA is not wired that way--not on these speculative stocks which can pop and drop rather quickly. But I want to learn how to ride a rocket ship longer before bailing.

Position: Lamenting HPJ - the one that got away and went up, up and away.


Biffermas (Chris) said...

Excellent post! Managing trading winners is so seldom talked about and is the weakest link in my trading plan. Thanks for a very reasonable strategy.

Glenn_in_MA said...

OT...TARP repayment...interesting questions raised by this issue at these links:

The same questions I've been asking myself over the past few weeks.

Leisa said...

Chris: Thanks for your comment. It's my number one self improvement priority for this coming year.

Glenn: Very interesting. Thanks for the links. Strange stuff. I've not immersed myself in these issues like I did with the systemic risk issues.