Pilcrow Symbols
Stocks Can Also Decline Sharply When the
Preponderance of Bids Turn to Offers
These obvious truths are neither new nor enlightening. However, they should be ever in the minds and memories of investors, as there is a possibility of change. Positive trends are friends of profitable position holders.
The egos of investment managers should not be allowed to result in large percentage losses in individual holdings.
Stocks which have been sold can always be repurchased when positive trends reoccur or are realistically anticipated.
Ideally, all positions should be outperforming a relevant stock market index.
The balance of bids versus offers depends on the aggregate attitude of investors, which can quickly change in response to predictions of future events.
Changes can be caused by company or industry developments, or just the opinion of a significant and aggressive investment advisor. The negative recommendation can be based on a technological or company competitive reassessment.
Two questions investment managers must address are,1) should losses in individual holdings be allowed to become more than a relatively minor percentage of cost, and 2) how best to protect positions having the greatest profit.
An answer to the first question is to sell stocks in the portfolio having a loss of more than 10%.
An answer to the second question could be to use stock options in buying puts or selling calls on a percentage of the position. Of course, hedging a relevant stock market index might also be a means of portfolio risk reduction.
The point is that the results of investment decision making are dependent on both timing and selection.
The investor can have bought the right stock at the wrong time or price or bought the stock on an erroneous prediction.
In any case, good portfolio management requires continuing adjustment to restrain losses and protect profits.
If the investment manager prefers to be less than active in securities selection, investing in an ETF or other fund could be a better approach.
The above observations and recommendations of this seasoned investment management advisor are presented in the hope they will prompt positive action.
Arthur Lipper, Chairman arthurlipper@gmai.com
British Far East Holdings Ltd.