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I have came across an interesting article in seeking alpha and decided to post it here to share with everyone and also for future reference.
1) Say you bought a stock and it rapidly rallies but yet not to the point where you think it is at fair value.
What to do? Sell half of the position, and wait. If the price falls, buy back the position. If it rallies further, sell the rest.
2) Say you want to buy a stock, but it is plunging. You have done your homework - the balance sheet is strong enough to self finance the company and it is currently valued at a huge discount, what to do? Buy half of a full position, and wait. If the company rallies sharply, sell the position. If it continues to fall, wait until it stabilizes, confirm the fundamental and buy up a full position.
3) Say you like a stock, but it has rallied past the buy point. What to do? Buy half. If the stock comes back to the buy point, buy a full position,. If it rallies further, sell the position.
The real benefit of doing half is the psychology of the situation. Many investors suffer from fear, greed and regret. When the stock price moves in favor of profits, be glad of those profits. When the stock price moves against profits, reanalyze and either a) go flat, recgonize your mistake, and being grateful that it was small, or b) increase the bet to full position, and be grateful that you didn't put a full position.
Scaling in and scaling out gives freedom to investors, and removing many of the psychological burdens that they bear. It dosent mean there won't be losses. There will always be losses but they will be easier to bear, with no panic that leads to selling off at the lows, or buying at the highs.
In short, money management is essential to successful investing or trading and this is precisely why I am currently putting more focus in this area.
Read the full article at http://seekingalpha.com/article/131980-the-wisdom-of-half-positions .
1) Say you bought a stock and it rapidly rallies but yet not to the point where you think it is at fair value.
What to do? Sell half of the position, and wait. If the price falls, buy back the position. If it rallies further, sell the rest.
2) Say you want to buy a stock, but it is plunging. You have done your homework - the balance sheet is strong enough to self finance the company and it is currently valued at a huge discount, what to do? Buy half of a full position, and wait. If the company rallies sharply, sell the position. If it continues to fall, wait until it stabilizes, confirm the fundamental and buy up a full position.
3) Say you like a stock, but it has rallied past the buy point. What to do? Buy half. If the stock comes back to the buy point, buy a full position,. If it rallies further, sell the position.
The real benefit of doing half is the psychology of the situation. Many investors suffer from fear, greed and regret. When the stock price moves in favor of profits, be glad of those profits. When the stock price moves against profits, reanalyze and either a) go flat, recgonize your mistake, and being grateful that it was small, or b) increase the bet to full position, and be grateful that you didn't put a full position.
Scaling in and scaling out gives freedom to investors, and removing many of the psychological burdens that they bear. It dosent mean there won't be losses. There will always be losses but they will be easier to bear, with no panic that leads to selling off at the lows, or buying at the highs.
In short, money management is essential to successful investing or trading and this is precisely why I am currently putting more focus in this area.
Read the full article at http://seekingalpha.com/article/131980-the-wisdom-of-half-positions .
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