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Position sizing, war chest, volatility, nibbles and gobbles. (What to do as the Yuan devalued and stocks crashed?)

Saturday, August 22, 2015

I have been inundated with messages in various forms from readers on how depressed they are or how they are in distress over the state of the stock market. 

There is something I say from time to time and I am pretty sure I have said it in my blog somewhere before:

"Investing in the stock market is like getting into a relationship with another person. If we expect it to be only a bed of roses, don't bother. There will definitely be rough patches."





So, during good times, everyone is happy. During bad times, those who are still able to keep their sanity and even stay quite happy are the ones who have 

1. appropriate psychology, 

2. appropriate money management skills 

and 

3. appropriate investment allocation framework.

Recently, on FB, I shared how a reader accused me of not sharing important ideas on position sizing until quite recently.

I have more than 2000 blog posts spanning a period of almost 6 years and it was quite possible that the reader might have forgotten more than a thousand of my older blog posts.

Anyway, this was what I shared:

Chatting with a reader in FB, he said that I only started talking about position sizing last year. Why didn't I talk about it sooner? Apparently, quite a few people bought stuff I talked about and some "showed hands", if you know what I mean.


Only last year? I don't think so.







Anyway, I searched my blog's archives and went through the 2,000+ blog posts. I am sure I talked about position sizing from time to time in my blog's early years although I might not call it "position sizing".


Well, my blog was founded in December 2009 and here is a blog post from February 2010:


See: "It is, quite simply, a question of proportion."

Only last year? Definitely not.

This leads me to how I recently had two blog posts which were basically conversations I had with two readers who were feeling rather despondent. They were just two of several emails I received from readers but they are enough to give us an idea of how some investors might be feeling now.






In both of my replies, I advised that they might want to consider "Eating Bread With Ink Slowly."  (See related posts 1 and 2 below.)

I also received messages asking me what am I looking to buy, what am I buying now and whether I am nibbling or gobbling? Well, I have side stepped most of these questions. 

This is a blog, my blog. I am merely talking to myself but people follow my actions and I have been stunned before by what some actually did and, later, said.




Don't understand what I am saying?

Well, it is like someone who decides to get into holistic living but because eating right is the least demanding bit about holistic living, that is all he decides to do. 

Then, he picks what he likes about eating right and it becomes eating wrong. 





Why do some people who eat a bit of junk food now and then look healthier than he does, he wonders?


See what I am trying to say?


I invest primarily for income. Investing for income has provided me with a passive income stream during good times and bad times. It is very comforting and that definitely helps to keep me sane.

I have invested in some stocks which have not done as well in terms of their stock prices but if their businesses are humming nicely and if they continue to pay me, I am happy enough.





I have invested in some businesses which are facing tough times but because I have sized my investments in these businesses according to my own circumstances, even if it would mean a total loss, if it should happen, it would not be a financially crippling experience.

I know what I am buying (most of the time). So, I am quite comfortable even if their stock prices go down and, in some cases, I am even looking to buy more.




So, what have I been doing?

Well, I have been nibbling some of this and some of that. Why? 

With lower prices, some stocks looked more attractive. What if prices were to go lower? 

Then, they would look even more attractive or were you expecting me to say that I would go into a depression?

Of course, prices could go lower. However, prices could also turn and go higher.





Our job is not to anticipate what Mr. Market is going to do although I try to engage in a conversation with my schizophrenic bowling ball from time to time. 

Our job is to have a plan on what to do if Mr. Market should do something. So, if something were to happen, we act. 

We can prepare but not predict. So simple, right? Simple but not easy for many.

Let me see if I can throw some light on the matter.







In market corrections, we might want to nibble if we think stocks look relatively attractive. 

Corrections are defined as declines of less than 20% from the top and prices move higher after corrections. 

What we saw up till the last trading session could be a correction. So, selectively buying made sense to me. 

If prices were to recover and move higher, good for me.

What if it wasn't a correction? What if prices were to move lower and we moved into bear market territory which would be a decline of more than 20%?





Well, then, we would be glad that we had been nibbling and not gobbling. Then, we would be glad that a big portion of our war chest is still intact. 

Our nibbling activities should not have consumed more than a quarter or a third of our war chests.

In a bear market territory where there are plenty of screams and cries of blue murder, where there is plenty of blood flowing in the streets, this is where we might want to sit tight and wait for the dust to settle. 

There will come a time or a few when the quiet returns.







Then, we might want to go and take a look. Of course, if we still have some funds left for nibbling and would like to nip into the streets while the blood is still flowing, that is OK too. 

Hey, who am I to deny anyone their spirit of adventure?

In closing, I would say that for those of us who get heart attacks from seeing prices plunging, we are probably more into prices than values. 

It could also be that we have been bad with money management and used up all our war chests too early. 

It could also be that we have sized our positions badly and we are stuck with having too much of one bloody stock (from bleeding and not profanity). 

You know what I mean?





Whatever it is, look at a bad situation as a learning experience and try to do better henceforth.


Alamak, have I been talking to myself again? 

I am so sorry.

Related posts:
1. Feeling depressed about paper losses?
2. Anything uplifting to say as stocks bleed?
3. Nibbles, gobbles, values and prices.
4. Be comfortable with being invested.
5. Managing exposure in investment portfolio.

18 comments:

Nightmare_Angel said...

I guess u have nibbled in Neratel and Arcodia? :p

temperament said...

Hi AK71,

Longtime no see lay!
What you have just said is very fair and very good. But your audience may be from 18 years old to me Ah Lau liew. Like Johnny Walker, I am still walking.

No author in this world can control what the readers think and do even if he writes with the best effort and best intentions.
Nah! Don't worry too much (if you do).
Regards.

AK71 said...

Hi Nightmare Angel,

Have I done that? I can't remember. Oh, dear. -.-"

AK71 said...

Hi temperament,

Hey, good to hear from you! I can always count on you for some level headed comments.

Kamsiah you for the encouragement. ;)

Tacomob said...

Hi AK71,

There is no one size fits all in stock investing. Everybody has a different shoe-size.

People have to invest some energy in the beginning and along the way to find their fitting investment system. And a system contains spelled out rules which most definitely have to include specifics on money management, position sizing and exit strategies.

Bloggers often do and share lots of ground-work to find the "right stocks" (what to buy), but the position sizing (how much to buy) and exit strategy (when to sell) has to be defined by each investor him/herself.

There are no lazy shortcuts by blindly following experienced investors like your goodself.

People need to understand that.

And I am convinced that position sizing and exits are much bigger determinants of a long-term investment success than just 'what to buy'.

opal said...

Good advice. Question: how to read when bloodbath is almost over? I don't think it is possible to time the exact bottom, but what are some of the signs that we can look out for when things are settling somehow?

qinzheng said...

Hi AK,

You have been kind enough to share, ignore those brainless creature; no one force them to read your dairy... Lol

jason said...

concur - if people reading your blog want to just hantam without considering the bigger picture/risk appetite etc, then they only have themselves to blame. Always so easy to ask why like this why like that when market goes down, but all keep quiet if price goes up. Looking forward to monday/tuesday's lelong on STI components when it moves down 100+ pts.

AK71 said...

Hi Tacomob,

Oh, definitely, I agree. I always say that we must know ourselves and our motivations. Then, find the right tools. We are all different from one another. Even those in the same "school" or "sect" might disagree on the finer details.

Unfortunately, like what a fellow blogger, SMOL, has said before, position sizing which is a big thing amongst traders is not something that figures prominently amongst investors. Exit strategy sounds like something associated with traders too although I am sure there could be times when investors should sell their investments, having done that at times myself.

Thank you for the comment. I like it. :)

AK71 said...

Hi opal.

We could use the charts to look for clues as to whether the trend is reversing. This is why technical analysis is useful even to investors. Positive divergence is what we should be looking out for. It is not just useful to traders.

AK71 said...

Hi qinzheng,

Aiyoh, no lah. They are not brainless. So bad, you. ;p

Anyway, I just have to be a bit more careful with what I blog about to reduce "incidents of misunderstanding". ;)

AK71 said...

Hi Jason,

Thanks for the support. ;)

I have been nibbling on price weakness, as you probably know. When it becomes obvious that the market is probably going down a lot more, then, it could be a good idea to keep our powder dry and wait for the dust to settle before moving in unless we have some seriously big guns. ;p

Let's see what happens on Monday. :)

Janice ng said...

pls don't stop blogging because of a few bad apples who keep blaming you when its their own choice.. blog lesser and avoid certain topics (like which "hot stock" to buy) but don't stop haha..

those ppl should also reflect on themselves.. they don't pay you a single cent but still follow what you buy and then come to blame you.. maybe you should tell them if they are paying you few thousands a month to manage their portfolio then come and complain.. lets see them complain to insurance companies and banks when their mutual funds/endowment policies earn lesser than the projected values haha..

AK71 said...

Hi Janice,

I really like how you put things in perspective in your last sentence. I never think of it that way. Thanks. I appreciate it very much. :)

I don't think I will stop blogging (yet). I still enjoy doing it. haha.. ;p

Singapore Man of Leisure said...

Ah choo!

So it' you...

I think we discussed a bit on risks management and loss management at your 3rd chit-chat session:

http://singaporemanofleisure.blogspot.sg/2015/03/risk-management-vs-loss-management.html


You also drew and explained your pyramid thingy... Speculative plays and core holdings are not the same.

If people show-hand with Marco Polo Marine, surely that stock can't be the base of anyone's pyramid? Or?

They must have forgotten about the China Minzhong saga too. Now make a wild guess where this stock fits in your pyramid?



But who is interested in such boring "housekeeping" stuffs when market is going up?

Selective memory.

We remember what we want to remember.

Next time you go for your public speaking engagement, bring along a wok as shield and your maggi mee pot as helmet!

AK71 said...

Hi SMOL,

Hahahaha... Indeed, it was me. The "Summon Guardian" spell works! What? D&D didn't have such a spell. Orh. Sorli. ;p

Your memory is good. Actually, at almost all the events I went to, starting from the first one last year in June (i.e. InvestX Congress), I would talk a bit about the pyramid thingee. Useful framework. Quite dynamic too. :)

Anyway, we have been through the emotions that many newbie and not so newbie investors are going through now. So, I guess we should be more understanding and even forgiving. Right? ;)

We remember what we want to remember when we should remember what we need to remember. ;)

With each stock market crisis, I realise my ZEN level improves. That is a good thing. :)

AK71 said...

Reader:
read about your warchest theory and going into the market at 'low' prices
how do you allocate your warchest?
my question is more on how do you determine how to select stocks for your watchlist and how to determine the buying in price

AK:
I primarily invest for income. So, most of the stuff I look at have an income component.
You have to decide for yourself what is important to you. I cannot answer that for you.

AK71 said...

If you are new to my blog. This blog post is a must read.

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