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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Bruce Brown who wrote (10230)	11/13/1999 2:49:00 AM
From: Mike Buckley	Read Replies (2) \| Respond to of 54805

Lindy, Ruffian and King Arthur: Skip to the next post. :) Everyone else, Having had a stock rise a lot faster than the rest of the portfolio leaves a very uneasy feeling for many people. In my case, my initial investment in Qualcomm was 17% of the portfolio value at that time. Right now it's 43% of my portfolio. If it becomes 60% of my portfolio, that's when I become really uneasy. We all know Bruce is right when he reminds us that the most money will be made by simply letting the share price appreciate over the years. However, for those of us who don't like the huge volatility that comes with having extreme concentration in one stock, there's not a thing wrong with increasing diversification by locking in some profits. I'll show below two strategies that allow you to diversify. They go into action only when the price falls. That forces you to allow the stock to run without trying to guess the top. Initial assumptions: Total Portfolio Value: $67,000 Qualcomm = 60% of the portfolio: 100 @ $400 = $40,000 The $27,000 in the rest of the portfolio remains constant. Strategy #1 -- Gradually increased diversification: Every time the stock falls 20% from its previous value, sell 10% of the original number of shares. The stock falls 20%. New Q value: 100 @ $320 = $32,000 Sell 10 @ $320 = $3200 Balance: 90 @ $320 = $28,800 + $3200 Cash + $27,000 = $59,000 The stock falls another 20%. New Q value: 90 @ $256 = $23,040 Sell 10 @ $256 = $2560 Balance: 80 @ $256 = $20,480 + $5760 cash + $27,000 = $53,240 The stock falls another 20%: New Q value: 80 @ $204.75 = $16,380 Sell 10 @ $204.75 = $2048. Balance: 70 @ $204.75= $14,333 + $7808 cash + $27,000 = $49,141 RESULTS: Your Qualcomm exposure is cut in half, reduced from 60% to 29% of the portfolio. Your portfolio has dropped in value 27%. Had you not sold any Qualcomm, it would have dropped to $47,475 -- a loss of 29%. No big difference there. You have $7808 in cash (not including taxes or commissions) to invest in other stocks. That's a meaningful portion of the total portfolio: 16%. Strategy #2 -- Immediately increase diversification: When the stock falls 20%, sell 30% of the stock. The stock falls 20%. New Q value: 100 @ $320 = $32,000 Sell 30 @ $320 = $9600. Balance: 70 @ $320 = $22,400 + $9600 cash + $27,000 = $59,000. RESULTS: Your Qualcomm exposure is cut by more than one-third, reduced from 60% to 38% of the portfolio. Your portfolio has dropped to a value of $59,000, a 12% loss. Had you not sold any Qualcomm, the portfolio would also have dropped to $59,000. Exactly the same. You have $9600 in cash (not including taxes or commissions) to invest in other stocks. That's a meaningful portion of the total portfolio: 16%. Comments? --Mike Buckley