Investment Lessons We Can Use: III

The following passages were taken from this great forum posting: http://www.wallstraits.com/community/viewthread.php?tid=1231&page=1

See also Investment Lessons We Can Use and Investment Lessons We Can Use: II

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When I identify an opportunity, I would classify them into one one of the above categories. For each category, I have established arbitrary maximum allocation limits (eg. 30% for Cat 1, 20% for cat 2 & 10% for cat 3).

If I identify a Cat 1 stock, instead of buying 30% at one go, I would buy say 20% and only if the stock price falls by 20% would I purchase the balance 10%.

In addition, if the stock continues to fall after I have acquired 30% and assuming this fall does not change my view of the stock I would not acquire any more shares, for the reason that taking too large a position in any company would constitute a gamble no matter how save I think the investment is.

The basic idea is that you do not want to be wiped out by any single decision and there should always be a limit to how much exposure we have to any company, no matter how save the investment appears or how low its price.

[ Comments: Ahhh... One of the better advice in my opinion. The very basic idea is that we are liable to make mistakes! As no matter how good we are we can make mistakes and logically, it would be darn silly to be wiped out by a mistake! And sadly, I do see this as a major problem with most local 'investors'. Having enjoyed one incredible bull run, many stuck to the idea that stocks must be held for the long run. Yes, I do agree but sometimes we need to question if we had erred in our stock selection!!! Did we make a poor judgement? And sometimes the stock might be good but overpaying for the investment would also yield a very poor result in the long run!

There were some chatter that "But most successes come from extreme mentality, those who practice stop-loss or target-win end up being average investors."

Here's my simple reasoning on the stop-loss thing.

So if we made a wrong stock selection, this is an investing mistake, yes?

So if it's a mistake, what's next?

Shouldn't one correct the mistake?

And would one do that?

Isn't the one and logical way to do is to admit to the mistake and correct it? And isn't this done by selling that stock (ie a stop-loss)?

And extreme mentality is simply hazardous. There's no point being a hero with extreme mentality if there is no logical reasoning in being extreme. It's like contrarian investing. I guess being a contrarian investor would makes one feel special but there's no point in being special if the reason to be contrarian is flawed.

Well, that's my opinion and obviously my opinion could be flawed. ]

The limits used for the various categories can be modified to suit the individual investor's risk appetite and comfort level, eg. you may set a limit of 20% for Cat 1 stocks and acquire an initial stake of 15% and the balance of 5% if the stock falls substantially. Once the 20% is hit, acquire no more shares of that company.

Personally I would not allocate more than 10% of my portfolio to any one China stock. From fundamental analysis these companies appear to be cash-rich with strong growth potential.

But for many of us we have not even seen the products they manufacture. Nor do we understand the Chinese business environment the companies operate in. How then can we claim to have sufficient understanding of the company to justify a significant allocation of funds.

[ Comments: Yet another good advice! How well do we really understand the business of the company that we want to invest in?]