BAGAKOAA October 31, 2009 Speaking of trick or treat
October 31, 2009
Speaking of trick or treat. October is our fist down month in the general market since February. On the week alone, we were down 3.9%. I am embarrassed because the correction I was sure was going to happen and mentioned on several occasions in August September, has now set in.
Personally I have had some major stops trigger, taking profits, but on the downside, creating a 2009 tax burden that has made me stop and think about my stop strategy.
In August I converted most of my manual stops to trailing stops. (Courtesy of wikipedia-A trailing stop order is entered with a stop parameter that creates a moving or trailing activation price, hence the name. This parameter is entered as a percentage change or actual specific amount of rise (or fall) in the security price. Trailing stop sell orders are used to maximize and protect profit as a stock's price rises and limit losses when its price falls. Trailing stop buy orders are used to maximize profit when a stock's price is falling and limit losses when it is rising.)
Well it worked, but a bit too broadly than what I intended. As you know I was heavy in AAPL, (about 8% of my portfolio). My average entry prices was 136 My trailing stop was a percentage trailing stop of 8%. AAPL topped about a week ago at 209ish creating a trailing stop of 191.36. Well we hit that on Friday, creating a nice chunk of change and tidy profit. BUT, (Behold the Underlying Truth), I can’t say I am proud of the move.
Here is why. AAPL is poised to easily be a 230-300 dollar stock. I encourage you to read the Q4 conference call notes. There is no down side. http://tiny.cc/NrRbW
So now I am faced with having to get back in and decide how to do that. Do I get back in at the level I was before or average my way in as I did in April-June? To answer that question I looked at why the stop out was so bad. What would I have done differently?
Let’s use some numbers so we can understand my thinking without telling everybody how much money I actually invested. Let’s say I averaged into the 136 price with an eventual total of 100 shares. In due time (after a 20% gain), I put an 8% trailing stop on all 100 shares in at the house of Chuck. It triggered and now I am out of AAPL, I paid Chuck to get out of AAPL, (I also found out that trailing stop orders are market orders, shame on me?), and now I have the gain which I will share with The firm of Reid, Pelosi, and Obama next April. I still want to be in AAPL.
Having considered everything, here would have been a better play. Once I hit my 20% gain, put a normal stop at the 8% down side for all one hundred shares locking in a 12% gain for sure. As AAPL hit a 25% upside, take the number of shares equal to the value of the 5% additional up and put a trailing stop on those shares only. Continue this all the way up keeping and possibly adjusting the regular stop on the initial investment dollars.
OK I just wrote that and it seems confusing. Here is how it would look. As AAPL hit 163 (20% gain), a stop on 100 shares at 150 (8% off the current price) is set, “locking in” at least a 12% gain on the initial investment. When the stock hits 170, 25% up from the entry point, put an 8% trailing stop on 20 shares of AAPL leaving 80 shares with a stop at 150. When the stock goes up another 5% to say 176, change your trailing stop order to 23 shares and consider bumbling your remaining stop order of, now, 77 shares to say 160 now guaranteeing you a 17% gain with more upside on the 23 shares with the trailing stop. If you continue this pattern, adjusting each week, last Friday here is how the picture would look.
You would have stopped out of 28 shares of AAPL instead of 100, you would still have 72 shares left with a regular stop in the 175 range (guaranteeing you a 28% gain on the initial investment), and you would share ONLY the gains on the 28 shares with R,P, and O Inc.
Ok I read it twice and it makes sense, to me. So let me get to work resetting the remains stocks I have with a formula like this.
BTW on Friday I was also stopped out of HON for a 16% gain. Good stock and I did not want to get completely out. I will listen to the conference call and probably get back in.
Say Hi to all the goblins tonight.
* New comers that means Boys And Girls And Kids Of All Ages
** New comers that is a rough translation from the Latin “Hurrah from Profit”