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Roger Nusbaum submits: Thus asks a reader in the following comment in response to my post about Novartis AG (NVS) and Caterpillar Inc. (CAT):

Who are you kidding Roger? It appears that you are emotionally attached to this stock. CAT is in a cyclical industry and the cycle is turning down. Maybe you should not be emotionally attached to it and sell CAT before it hits the bottom. If you love it so much you can buy it back with significant discount later. Just a reminder: Buy at low and sell at high (not buy at high and hold it until it goes higher, even if it is 10-20 years from now). Good Luck with holding cyclical stocks!

The big difference, I think, with where this person is coming from compared with where I am coming from is it seems like he is more of a trader than a long term investor. I take from his comment he owns zero industrial stocks. Going zero in anything is a big bet that is more appropriate for people that take more of a trading tack to their account. Since I manage long-term money for other people and tell them we maintain diversified portfolios (which is the right way for me to go) going zero is off the table. If you don't view yourself as being a nimble trader, you may want to think twice about going zero in a sector of the market.

The sale of half the CAT position in May was done out of an attempt to look forward due to concern that the economy would slow down in some magnitude. Reducing industrials made sense on that basis. The long term fundamentals, in my opinion, did not change the day I sold, and they did not change with earnings news from Friday. The shorter term story though has changed a little to be sure.

Volvo Chart 23 10 06This is a chart of another industrial name that most clients own: Volvo (VOLV). The other day I mentioned that industrial stocks are prone to big swings, and this chart shows a rough patch for Volvo last spring.

I did not sell into this, as I did not think the long term story had changed. Someone bought at the top tick in May, and someone sold at the bottom tick in June. Neither person thought they were placing the wrong trade.

For about a month the buyer looked dead wrong, but now doesn't look so bad. From a price of $54 on May 10, that buyer is up 14.8%, compared to 3.4% for the S&P 500 index for the same time period.

The point here for an investor, as opposed to a trader, is that there is no way to know whether CAT is, after the decline on Friday, now still higher that it will be for the next year, whether $59 is a bottom, or if this point is the middle of a range.

Part of the decision to keep or sell a stock after a big decline for an investor is whether or not you think the stock is still a good way to capture whatever you intended it to capture. It is not too often that the entire fundamental picture of a company changes at the same time the stock price moves by 10% in a day.

Again this is not to say stocks never get sold; I write about tweaking positions whenever I make changes. But it is to say that a big price change does not have to automatically mean a trade has to be made when the outlook is long term.

Obviously a trader would view this differently, which is fair game, and where I think the commenter is coming from.

A last point is about diversified portfolios. In a diversified portfolio not every stock you own will be going up. If they are all going up at the same time, what do you suppose would happen during a downturn? Volvo is up 30% YTD. There are a couple of other names that are up similar amounts. These offset any names that are down or lagging the market (of which there are several in client accounts). Hopefully the blend of winners and losers gives an overall result that is acceptable.

Source: Investing Is... Using Stocks To Capture an Idea