The "Stock Trading Riches" Investment System

[PraveenP]

Hi Aim Hier,

You are right that you can have more than $2,000 invested in a position that had successive buys, but I don't focus on how much I've invested in any one stock.

I only focus on my return at the portfolio level and don't track accumulated investments and returns at the stock levels.

For example, if I invested $2000 in a stock at $10 and, after one year, it was at $5, I would invest another $1,000. So now I would have $3,000 invested in the stock.

But, the market does not know that I spent $3,000. That is the self-correction of rebalancing. The past is a sunken cost and should be considered erased or "reset". From today going into the future, I have the same profit/loss potential as someone who bought their whole $2,000 position at $5.

So, at the start of the year, I would consider that I have a $2,000 position in the $5 stock. If it went bankrupt, I would lose $2,000 from the current value of my portfolio (the $1,000 is already reflected in the current portfolio value).

An example of a deep diver I've had is Glenayre Technologies. It's old ticker was GEMS, it then became EDCI, and finally EDCID when it got delisted from NASDAQ.

I originally bought it at $5.65 then at $2.29, and finally at $0.68.

At the end of 2008, I needed to use the "triage" rule from my book because I could not add enough cash into the account to rebalance all positions. So, I had to choose some positions to sell off, so that I could rebalance others.

This was one of the positions I chose to sell because it was so weak and, fundamentally, their attempts to diversify out of CD/DVD manufacturing (they had a large market share, but its a dinosaur business) weren't working. I sold the whole position at $0.41 (ouch! ). Even if I didn't use the triage rule, I would have probably sold the position anyway because of the fundamentals.

(In 2009, some allegations came out that management had been doing something funny, and they settled a class action shareholder suit. I recovered something from that - though I never counted the settlement in my annual returns).