As part of my continued effort at sharing with all of you readers my actual trades in my actual trading account, I wanted to let you know that yesterday morning, shortly after the opening, I sold 15 shares of my 105 share position of Graham Corporation (NYSE:GHM) at $86.00/share. In spite of the awful market tone, Graham continued to do well yesterday, and actually closed at $90.50, up $2.45 or 2.78% on the day.
Why did I sell any shares – and why 15 shares, and why yesterday?
If you are a regular reader of my blog, you will know that I sell shares of stocks for two basic reasons: "good news" or "bad news." I define "good news" as a stock reaching appreciation targets - that is going higher in price - and reaching levels that I have set up artificially at certain percentage gain levels. To explain, I use 30, 60, 90, 120, 180, 240, 300, 360, and then 450, 540, 630%, etc., appreciation levels from the original purchase price as intermediate goals. That is when a holding reaches these levels, if it ever does; I initiate a sale of a portion of that holding.
When I first started this blog I believed if a stock moved higher 1/3 to 4/3 of its original price (an approximately 30% appreciation), then it made sense to always be selling 1/4. However, that was, as I found out, far too extreme a portion of a holding to sell at these same intervals as my position shrunk in size as the stock appreciated in price.
I tried 1/6th, but again no luck. It appears that selling 1/7th of a holding is working at taking a portion 'off the table' yet leaving enough behind to see it actually grow absolutely.
The "bad news" part of a sale is when a stock is sold either because of some fundamental news announcement (such as a poor earnings announcement or the management accused of wrongdoing), or simply because the stock has declined from a higher level.
Generally, after a stock has declined 8% I sell the stock if I have never sold any portion of it at an appreciation target. If, on the other hand, I sold 1/7th of a position (like I did today with Graham) and then the stock dips in price, I do not plan on waiting for an (8)% loss to sell, but instead move the sale price (of the ENTIRE position) to 'break-even,' that is, the price that I purchased the holding.
For instance, if I sold a stock more than once at different appreciation levels, (I sold a stock three times at 30, 60, and 90% appreciation levels), and each time sold 1/7 of my holding, then instead of waiting for an 8% loss, or even waiting for the stock to move back to 'break-even,’ I sell the stock if it reaches 50% of the highest appreciation sale level. In this case, since the highest appreciation sale of this hypothetical holding was at a 90% appreciation level, then my sale point on the downside is if the stock declines to a 45% appreciation level. All of my sales on the downside are ENTIRE positions - unlike my partial 1/7 position sales on the upside.
Anyhow, I am sure that for you regular readers this commentary is entirely redundant. However, if you are new to this blog, I hope you appreciate some of what I would call my "inner-workings" of my portfolio management strategy.
Finally, I use sales of stocks as signals. These are signals, which in the case of sales on the upside or "good news" sales that suggest this might be the correct environment to add a new position. I call this my "permission slip" to add a new position (if I am below my maximum of 20 positions).
Likewise, I use a sale of stock on "bad news" as a signal as well. In this case telling me that there is something 'bad' in the environment and that I am well-advised to do what I call "sitting on my hands" with the proceeds (again, of course, unless I am at my minimum of 5 positions - in which case I would replace the holding with a suitable candidate).
It is this way that I can shift my holdings in a fairly automatic fashion between cash and equities. This part appears to be working as I am now at five positions and the market environment is frightful.
Let’s get back to Graham.
My 105 shares of Graham (GHM) were purchased in my Trading Account at $64.48/share. With stock hitting $86, this represented a gain of $21.52 or 33.4% since purchase. This exceeded my 30% appreciation target yesterday, so this morning I sold 15 shares or 1/7 of my 105 shares, leaving me 90 shares which actually went ahead to move higher.
Ironically, I have now received a 'permission slip' to start adding new positions. I didn't find anything on the top percentage gainers list (where I start looking) that was 'suitable,' and as a result, decided to continue to 'sit on my hands' with the proceeds.
That nickel is burning a hole in my pocket already and I will also be on the lookout today for something suitable for my portfolio.
Disclosure: The author owns GHM.