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How do you enter and exit positions?


dabuff
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If there's anything I've gleaned from the greats it's that we shouldn't be worrying about 1/8s (courtesy of Mr. Phil Fisher).

And it often turns out to be best to make such decisions when the markets are closed so as to not get distracted by the noise.

 

If stock X is trading at 100, and you have calculated that it is worth a buy at 95, what do you do? Do you like to set limit orders at the bid or ask, or just at the market price (and what about large vs microcap)? Does the price movement of the previous day/week/month ever affect you? Do you use options to enter/exit positions?

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I generally enter and exit positions slowly, but it does depend on the position, the thesis, etc.

 

I'll generally start off with a 1-2% position as I'm doing my deeper dive into the company. If I like what I see, I normally build that up to about a 5% position in relatively quick order and wait. A full position for me is around 10%. To get there, it requires a potential for an immediate catalyst OR a 15-20% decrease in the price from my average purchase. If the price decreases 15-20%, I'll add another 2-3% and wait for further decreases of 15-20% to add more. Once I have a full position of 10%, I'll regularly "trade around" the position adding 1-2% (10-20% of the position) as the price falls more and selling 1-2% if the price has risen quickly with little fundamental support.

 

I do occasionally sell puts to enter positions, but if I've made up my mind, I generally want the stock and not the simple carry from premiums with the potential of never actually owning. I will sell puts to increase a position after I own the stock as part of my "wait for a 10-15% decline before adding" strategy.

 

 

Also, as for your example, if I think a stock is worth $95 and it's trading at a $100, I don't buy it. If I already own it, I sell it in increments at different, pre-set price points. I do allow myself some flexibility around these price points depending on what alternatives I have available for investment at the time.

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I like what Ian Cassel said about how he buys. It's basically "pyramiding", but not based on price (the way momentum traders add to positions when things are going well), but based on whether the company you are investing in delivers or not, ie, does management do what they said they would. Makes more sense to me than averaging down.

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If a stock is trading below where I'd buy at I just add it to a watch/alert list and wait. Yahoo Alerts is great for that. I really don't ease into positions much at all--my first purchase is generally a 5-10% position (that can grow to 15-20% over time based on conviction/management performing). By the time I get to the point of purchasing I've done extensive research over a couple quarters so I'm already very comfortable with the company and management team.

 

The only time I use limit orders is in illiquid stocks. If I think a stock is undervalued by 200%, who cares if I buy it at $21.27 or $21.32?

 

My exit strategy is similar. There are times where I sell small parts of a position to make room for a new purchase but in general I'm the "all in or nothing" type. If I have enough conviction to buy a stock I'm putting in a large order up front. And if I think a stock has appreciated to fair value and/or the thesis is broke, I'm probably selling all at once.

 

 

innerscorecard,

 

Coincidentally I just discovered your blog earlier today. Was very impressed with the couple posts I read so you gained a new follower  :)

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