Getting Clobbered: Why I Changed My Investment Rules

by: Robert Freedland October 20, 2008 | about stocks: NOV    

Robert Freedland

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With the market moving higher (at least temporarily on Friday), I visited the lists of top % gainers and since I was under my five position minimum, I had a 'permission slip' to be buying a new position, I was looking for a possible new holding.

Seeing National Oilwell Varco (NOV), an old favorite of mine, moving ahead strongly, I purchased 210 shares at $28.796, near the high for the day. The company's latest quarterly report was strong, and its Morningstar.com "5-Yr Restated Financials" were also impressive. Even I wasn't prepared for the same-day price volatility in this stock.

Reviewing the Yahoo Finance Chart for NOV for 10/17/08, you can see the wide price swing of this company Friday as it swung higher and then dipped in an almost as strong fashion.

click to enlarge

National Oilwell Varco actually closed at $25.58, up $2.05 or 8.71% on the day.  But my performance was obviously rather less than that.  Based on that purchase price of $28.796, I already had a loss of $3.216 or 11.2%.

Should I be selling at this point?  Somehow I don't think so.  Maybe this amateur is learning something.  My entire strategy is based on avoiding compounding my losses by stepping away from the market when times are bad - so-called 'sitting on my hands.'  However, I am getting clobbered in the extreme portion of my own strategy, my insistence on keeping myself at five positions is allowing me to compound my losses, buying stocks in sequence after they hit sales points on losses, instead of avoiding reinvesting in a declining market. Something is very wrong with my approach!  

I have two proposed changes.  In the bottom five stocks of my range, that is when I am down to five or less holdings, I will continue to sell portions at the same intervals as they appreciate.  In addition, on the downside I shall be doubling my loss tolerance to 16%.  

The next change - when I am adding stocks to get to my 'five minimum' holding, I shall decrease the size of my purchases.  That is, if my 'average' holding is approximately $5,000, then my purchases that I make 'just to get back to five' shall be half that size, or $2,500, for example.

These holdings will still be good as indicators for my portfolio, but they haven't really shown that the market is truly ready for a new holding.

Will this help? I don't really know.  This is all new territory for me.  For us all.  And while my overall performance has been above the S&P for the last 18 months, I am quickly declining to match the mean, if I haven't done so already.

Disclosure: The author owns NOV.

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This article has 8 comments:

  •  
    Oct 20 11:04 AM
    First of all...you're reacting...you don't have a real game plan. That's fatal in a normal environment much less in an environment that shows the vix at 63. If you're an amateur, don't short-term trade in this environment (i.e. vix above 60-70)...you will continue to get your head handed to you. Buy cheap etfs and forget about them.
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  •  
    Oct 20 11:20 AM
    check insider trading.buy as low as possible & hold good dividend stocks.if you have youth on your side use drip plans.ignore the ups & downs.it worked great for me.also limit your ownwership to 200-500 shares & be very diversified.that way you cant really take a big hit.of course im talking about a dummy like me that was never in the short,put,option etc.plays.
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  •  
    Oct 20 02:03 PM
    i like the cheap ETF idea. many of these are down 50 +%. Probably the good ones are some of the pro funds SAA, QLD etc
    Reply | Link to Comment
  •  
    Oct 20 03:03 PM
    "check insider trading"

    following insiders never helps you to see the bullet that actually kills the company...e.g. Aubrey McClendon was recently blown out of his ownership stake in CHK. I'm not saying insider buying is bad, just make sure you know management well enough to make sure that they're not trying to be icarus (Al Lord from SLM corp was another headline grabber last year when the SLM buyout deal tanked...he then proceeded to drop f-bombs on the ensuing conference cal)l.
    Reply | Link to Comment
  •  
    Oct 20 03:41 PM
    Buy low, Sell high. Don't chase stocks up - they will likely come back down. Keep a list of quality stocks that you are interested in based on fundamentals, earnings, growth, and financial strength. In this volatile market, buy using limit orders whan they appear to bottom out and sell using limit orders when they rebound. Then repeat. If you buy stocks with good dividend yields, all the better, because if you miss on the bottom on the stock continues to drop and need to hold, you will still get a return on yoir money. Also, dividend paying stocks are and will be attractive so they are less likely to stay depressed. When to sell: when you think you can buy back the stock at a cheaper price based on its market fluctuations in the absence of any significant company-specific news. Have a good number of stocks on your list so you always have options.
    Reply | Link to Comment
  •  
    Oct 20 03:51 PM
    When you perchased your shares at $28.80, you should have sold a $30 coverted call out two or three months. You also should have rounded off your purchase to 200 shares so 2 calls would have covered your whole position. Selling covered calls does limit your upside but it also limits your downside risk.
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  •  
    Oct 20 04:31 PM
    NOV is a stock that I follow closely. Thankfully, it is a money maker that I have been in and out of 3 times these past 4 weeks, last buy was at $22.42 - and I am holding this position ...
    NOV is a great company that I will buy more of on any serious dips..
    A true valuation star ..Once we get rid of the nefarious hedge funds unwinding disasters, NOV will be golden ...
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  •  
    Oct 20 10:57 PM
    There are many good strategies for buying stocks. I appreciate some of the above comments. NOV is also a favorite of mine that I have examined in the past and have kept it as an "investable" pick.

    When I was given the opportunity to buy shares through my own idiosyncratic system, NOV was where I moved. Clearly, tight stops under stocks doesn't work in this sort of market. That is the point of my entry and my 'thinking out loud'.

    However, I don't think there is anything wrong with buying stocks moving higher on strong momentum.

    As you will note, NOV made a strong move higher today, getting me out of any sell-zone in any case and letting me hand on for another day at least. I also purchased some Imperial Oil (IMO) today, adding to my energy holdings in my account. (Along with NOV and GHM).
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