Ask Colin

I find buying in tranches, position sizing and stop-losses a pain. Is there an alternative?

The detailed question was:

I find the phase approach (for example, buy half first to test the water before committing the full position OR sell half first if things not go well as per plan ) quite suitable to my style. However, I also find it quite complicated on calculating the positions size and stop loss points. I know some people they do not do these due to the complications. I wonder if you have any general comments about Buy/Sell phase approach?

Your  question raises two issues:

  1. Why phase into an investment (i.e. buy in stages)? The reason I do it is an integral part of my investment plan logic. I am looking to buy breakouts from accumulation zones (value  model) and consolidation zones (growth model). The models indicate that an uptrend should follow the breakouts. However, it is not a certainty. Breakouts can fail to lead to a trend. Buying in stages is a risk reduction strategy. I by some shares and if the trend does not eventuate, I sell out with a small loss. However, if the trend does develop, I buy more. If the trend is further confirmed, I complete my buying. I do it in three steps, but this is not something magical, just my judgement. You seem in your questions to be very concerned about missing trends by acting too slowly. I think this is a mistake borne of inexperience. If you have a good set-up, there will be many opportunities and you don’t have to rush to try to buy them all. If you just buy some of them, you should do well. What can hurt us is not missing an opportunity (that has no cost), but buying a big parcel and then it goes wrong. It is big losses that hurt our returns. I think you need to focus much more on risk management and less on the fear of missing every opportunity. On this issue of risk management, see the quotation from Dr Elder’s book in my recent presentation Peering into the Crystal Ball on the members website.

  2. The calculations you need to make are really very simple. I have published my position size calculator on the free website on the Free Resources/Data and Other Files page. You should be able to easily adapt it to your investment plan. Setting stop loss levels and calculating position size are not just a nuisance, they are what keeps us safe i.e. absolutely central to risk management. You should want to do them and you should feel you are trading naked if you have not done them before buying a stock.