Building Positions

[spartansaver]

One of my worst areas of investing has to be building a position. I mainly deal in the micro space and can move prices with small orders. Does anyone have any recommendations of things to read to help in this area? Is it worth just finding a full service broker and letting them deal with it?

[Malmqky]

This is my downfall too. No recommendations, except consider building the position over the course of months and not weeks. And be a stickler on price, especially with illiquid stuff. FRPH is a good example, just look at the chart.

[Gregmal]

Yea I just make it a point to at least buy a little bit almost mandatorily over a decent chunk of time. With discretion can buy a lot but always be buying something as long as it’s within your price range. Also complement this with selling puts.

[jfan]

This is a great question and one that is so relevant that I also have been struggling to solve. I think it is a combination of your mental/emotional make-up, your portfolio limitations, and how you manage your cash. 

 

I try to be rational but I find that I'm generally too emotional and experience too much buyer's remorse and FOMO for my liking. I personally find devising a pre-planned buy/selling strategy and automating it helps reduces my bad behaviors vs trying to making on-the-fly spontaneous transactions.

 

I also struggle with balancing having cash on the side-lines vs having to sell out existing positions to fund better new positions.

 

After some reflection, I've been trying to adjust how I build up a position so that I can minimize my sub-optimal behaviors. Far from perfect, and still field testing it, my approach (at least the one I'm trying to refine) is:

1) Ask myself the following questions:

    a) To what degree do I understand this asset, the people, and industry (low, moderate, high)

    b) To what degree can I change my mind (depends on your own mental make-up) and reverse my position easily (depends to a degree on trading liquidity) (very hard, ok, very easy)

    c) To what degree can I see identify the downside, upside, and certainty of when the value realization will occur (1 out of 3, 2 out of 3, 3 out of 3)

 

2) Depending on the answers to my questions above, I have the following tools to build a position in the portfolio

    a) dollar cost average at market prices on pre-planned days over a time frame (if there is a catalyst - shorter time frame, if there is none - a longer time frame ie 2 years) (and to some extent depends on the volatility of the share prices - very volatile, shorter buying intervals, not volatile, longer buying intervals)

    b) a variation of the @Parsad method. If the current price will get me a 10-15% return, I initiate 10 - 30% of my ultimate target position size. At fixed % price declines, I buy increasing amounts with a willingness to go 30% over my ultimate target position size. This way I will average down to a price that might be 10-20% in the red relative to the market. At this point, the stock price expectations of the fundamentals need to be quite pessimistic AND I have to believe that this is not truly reflective of reality. This way, the stock price only needs to compound 2-4% annually over the next 5 years for me to break even. 

    c) Or a combination of the 2 tools above

 

3) With respect to cash "dry powder" management, I still struggle with this as I don't like to use margin but I appreciate that time in the market is important, and the opportunities to buy and sell don't necessarily coincide with each other. I think it is reasonable to always have 5% in cash for optionality even if my bank account pays little interest but this is balanced by the fact that it gives me true flexibility. If cash builds up greater than 5%, I think (I haven't quite implemented it yet), to have some index equivalent to park the funds in and use this as funding source when the time comes. An alternative that I've been toying with is, instead of an index etf, to buy a basket of global stock exchanges as a proxy for the trading activity of the underlying index stocks. If an index is hot both on the upside and downside, the exchanges will do ok either way (a Murray Stahl idea)

 

I don't know if this answers your question but these are some of my thoughts on this subject. 

 

 

 

 

[ValueArb]

Interactive Brokers has an accumulate tool where you can have it slowly buy small numbers of shares at intervals throughout the day, and limited to specific ranges you specify, such as just above bid up to a max price. 

[Saluki]

John Neff had a term for this:  Measured Participation.  You can start buying small and keep adding.  You don't have to eat the elephant in one big bite. 

[schin]

On 10/25/2023 at 12:40 PM, Saluki said:

John Neff had a term for this:  Measured Participation.  You can start buying small and keep adding.  You don't have to eat the elephant in one big bite. 

 

@spartansaver I trade microchips and small caps very carefully. The spread on some of these illiquid stocks can be 10-15%.  So, right off the bat, your stock needs to appreciate that much to compensate for the spread. You can build the position slowly, which is great... But, when bad stuff happens and you need to sell... That's when all hell breaks loose... I mean... you "can not" slowly sell when they deliver bad news.  Orderly evacuations are not commonplace.  When I want to be out, I want to be out...  I'm not impulsive, but when the CEO/President makes an obvious non-shareholder friendly move.... in many cases, you're SOL and either along for the ride or taking a huge loss.

 

You're focused on the building up a position and I think you need to focus on the exit strategies. If it's a great microchip stock, it's normally closely held by a family and if you do not agree, you gotta go hostile and that's not easy or fun... 

 

I experimented with HK stocks like Wharf Holdings... and it came out well, but the juice wasn't worth the squeeze for me. Even when it was 50% below market value.

 

[pricingpower]

For listed shares I find it's helpful to use a combination of displayed and non-displayed orders (called "iceberg" at Interactive Brokers and "Reserve" when using directed orders in Fidelity's Active Trader Pro app) so size doesn't move the market as much.  Interactive Brokers has nicely flexible tools for doing things like % of volume or a hidden order floating at the middle of the bid/ask "midprice" but their commissions can get expensive.  I find myself mostly using the "TV05" or "TV10" directed trade routing on Fidelity for medium liquidity names where an algo tries to execute x% of trading volume.

[SharperDingaan]

You get what you pay for. If your intent is to 'trade' you need to be in the $3-10 stocks; and using margin to mitigate against the periodic 'no bid' (why the spread rose). When it goes 'no bid' use the margin to make an all-or-none stink bid; when liquidity returns, bleed the shares off and repay the margin. If your intent is to 'invest', these are the wealth makers with 6-10 yr holds, that are periodically added to; bail, and you're also bailing on a fully paid off house within 10-15 years. 

 

Know your game. 4,000 shares at $25, is not the same as 100,000 shares at $1. You buy cheap when you're fairly sure the $1 share is actually a $3 share covered in sh1te; your hope is that the fertiliser, plus years of rain will grow it into a $5+ sparkler, and a 500K mortgage repayment. That $25 share that grew to $28 is only worth 112K, and not going to move the dial.

 

SD

 

  

Edited November 3, 2023 by SharperDingaan