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| Symbol | Sector | Return | Exposure | Trades | Last Trade | Status |
|---|---|---|---|---|---|---|
| CUB | Electronic Equipment | -11.15% | n/a | 2 | 08-Aug-07 | Prior Holding |
08-Aug-07
Selling Cubic (CUB)
Holding Rationale for CUB.
I do not know why Cubic dropped today. The news out there is good. But with the uptick rule gone, short-sellers can readily depress stocks if they choose. But they too shall need to buy back those shares. Perhaps doing so from people like me who sell when the stock is lower just because it is lower.:(. In any case, this is my update from Stock Picks Bob's Advice (http://bobsadviceforstocks.tripod.com/bobsadviceforstocks/index.blog?entry_id=1733259) Wednesday, 8 August 2007 Cubic Corporation (CUB) "Trading Transparency" Hello Friends! Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice! As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website. Just yesterday, I was reading an excellent column by Roger Nusbaum about stop orders. He questioned the wisdom of using blanket 8% stop orders that limit losses to 8% on all of your purchases. This happens to be my strategy in my portfolio. Perhaps wisely, he argued that different stocks experience different volatility patterns. One could say that due to different 'betas', the stocks with larger volatility deserve a larger range to travel, or perhaps one should tolerate a larger loss on these high beta stocks. Roger wrote: "A common strategy for placing stop orders is simply to put one 8% below your purchase price. This has never made sense to me for several reasons. I advocate for tailoring your stop order to your stock, for reasons I'll make clear as I review why using this rule of thumb is more like hitting your thumb with a hammer." I cannot argue with his thinking. Perhaps it would be better to have a 'beta-adjusted' risk tolerance. But then again, a better question is whether the application of these 8% loss limits is a successful strategy. William O'Neil, the publisher of the Investor's Business Daily has been a big force for the utilization of 8% loss limits. O'Neil, in an interview on Motley Fool commented: "TMF Otter: You've stated publicly that an investor who followed your system would have avoided the egregious losses suffered by holders of Enron or Global Crossing. How would an investor be protected in your mind without also taking the chance of selling out on good companies way too soon? O'Neil: My rule is simple -- any stock that I buy that declines 7% or 8% below my actual purchase price, I will always without exception, sell to cut short my loss. TMF Otter: No exceptions? O'Neil: None. This way I guarantee myself that my capital will never be exposed to a 25%, 50%, or 75%, loss which is always difficult to recover from. So, your first loss is always your smallest loss. The only insurance policy you can take out to protect against a large devastating loss is to cut them all without exception while they're still small." I have chosen this approach and have found that it has been successful in providing me with the discipline and the rules that are the framework to my trading activity. I avoid making any exceptions; even though I write often about my ability to choose to override any of my rules if I feel it is required. I also have written about selling stocks even if I have held them for a very short duration. And that is exactly the case with Cubic Corporation (CUB) which I sold this morning, bringing me back down to 18 positions, after it passed that 8% loss limit for no particular reason that I could find. Earlier today I sold my 280 shares of CUB at $28.6888. These same shares were purchased two days ago (!) at $32.32. Thus, in the very short period of 48 hours, I had managed to incur a loss of $(3.6312) or (11.24)%. In these particular situations, I do not have time to calculate whether the beta of the stock deserves a larger leeway before selling. My decision was terribly wrong for reasons I have yet to decipher. But that doesn't matter. No matter what Roger has to say (and I greatly respect Roger for his accomplishments as a fellow blogger as well), I have found that the less exceptions we make to our own rules the more likely the rules will serve us well in the long run. Those shares were sold without hesitation when I saw the price they were trading at. With a sale at a loss, I do not have permission to replace that stock with another. I applied the proceeds to my margin balance and shall be waiting for one of the other 18 to hit a sale at a gain and I shall try again with another investment. Thanks again for stopping by and visiting! If you have any comments or questions, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com. Bob
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2 Comments on "Selling Cubic (CUB)"
Regarding the matter of O'Neil's 7-8% stop rule: I've long believed that although the principle behind having a stop is solid, fixing the % is not.
Why?
1. Some stocks fluctuate that much and more per day. CUB shot up 26% on 8/10.
2. The 7-8% pullback may well coincide with major chart support. If you’re buying on the basis of a chart idea, it makes some sense to me to base your initial stop on a chart idea as well. This would be right under the most recent low, not closer, no matter what % is involved, because closer means it’s well within the noise range, which means way too close!
There is a simple solution which will preserve the principle of having a stop, but not too close:
1. Size your position before entering, so that your $ risk is the same for all positions. Here’s the way this works:
2. Decide beforehand what % of your account you’re willing to lose per trade. The maximum should be 2%, but should probably be lower. So, if you have $50,000 in your account, the maximum you should risk on any trade would be 2% * $50,000, or $1000.
3. Using CUB as an example, if you were to buy this at the close 8/10, 32.89, the closest you could put your stop would be at 25.99, one tick under the recent low. That’s a risk of 6.90 points per share, and 21% below the buy price. If you’re limiting your risk to $1000 in this hypothetical example, you’d divide the $1000 by 6.90, and that would give you 145 (rounded up) shares. To check your arithmetic, 145 * 6.9 = $1000.
4. But then figure your cost, which is 145 * 32.89 = $4769. This comes to 9.5% of your account. If you sized every position this large, you’d only be able to be in 10.5 positions, which is well under the optimal level for proper diversification. Ideally, an account needs to aim for 30 plus positions. If you were intent on aiming for 30+ positions, you’d divide your total equity by 30, which gives $1667, and then divide that by the buy price of 32.89, which gives 50 shares. So, depending on whether you are intent on diversifying broadly, or not, you could have as few as 50 shares, and as many as 145, but not more.
5. Note: this approach is not the same as allocating the same total $ per trade. That will vary considerably. It’s a way to minimize risk across all positions, allowing for the great differences in various positions, and insuring your ability to stay diversified.
Posted on 11-Aug-07 13:28 by Don_Bartell
Thanks so much for writing. Certainly if we give out holdings greater leash than we shall not get stopped out so quickly. But I am not concerned about my sale after just 48 hours. My portfolio was talking to me. Like a child touching a hot stove, I quickly unloaded my recent purchase as I should do because there was something terribly wrong with the market and not a time indeed to be buying!
But that doesn't mean that your approach wouldn't be successful or even more profitable than my 8% loss limit. Just that it is a different way of doing things. It is a great idea and I hope that you explore whether it is successful for you in practice!
Bob
Posted on 11-Aug-07 14:18 by BobsAdvice
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