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Author Topic: How to reallocate profits?  (Read 21460 times)
Super Stock Picker
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« on: February 20, 2007, 12:06:44 AM »

Starting Out - I have read the various ideas on how to start out-basically buy equals parts of the present buys (or this is one idea).

The question is- when I sell my first sell- let's say at a profit- would the idea, based on the fact that I still have 4 stocks, be to split the profit among the current 4 stocks I own plus the next recommended buy. Based on a $1000 profit and $1000.00 in each stock- after the buy I would have $1200.00 in each stock.

Is this the general idea of having continuous same weighting and therefore a better chance of meeting your posted returns?

Jeff
« Last Edit: February 20, 2007, 12:08:27 AM by Super Stock Picker » Logged
Super Stock Picker
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« Reply #1 on: February 20, 2007, 12:07:43 AM »

Hello,

If you want to follow our portfolio as close as possible, you should follow two rules:
- The capital is always fully invested.
- The weight of the stocks is equal to their performance in the portfolio since they are on hold.

If I take your example again, here is how it could be:
Imagine you had bought these 4 stocks the same day, for 1000$ each.
A few weeks later, one stock is to be sold and a new one to be bought.
At that time, the stock would show the following performances:
- Stock 1, to be sold, +100%, 2000$ value
- Stock 2 and 3, + 20%, 1200$ value each
- Stock 4, -10%, 900$ value
The total value of your portfolio would then be 5300$.

The proceed of the sale will then be 2000$ to be reallocated between the new buy and the old stocks on hold. Let's found how much to allocate to each stock:
The new stock (stock 5) to buy has obviously a performance of 0%, its weight in the portfolio will then be 1.
Stock 2 and 3, performance of 20%, will have a weight of 1.2
And stock 4, performance of -10%, will have a weight of 0.9.
The total of the stocks' weights is then 4.3.
Knowing the total value of the portfolio is 5300$, they will have this amount allocated the following way:
- Stock 5, 1 / 4.3 * 5300 = 1233$
- Stock 2 and 3, 1.2 / 4.3 * 5300 =  1479$
- Stock 4, 0.9 / 4.3 * 5300 = 1109$

As a result, the new buy plus the reallocation of the sale would result in 4 buys:
- The new stock, stock 5, buy 1233$
- The stocks 2 and 3, buy 279$ for each
- And the stock 4, buy 209$

This is exactly how our system works and how the performance shown on the web site are calculated.

But, with small amounts of money like in this example, it would make a big portion of your money to be lost in transaction fees.

So, you might also go with a more practical approach for the small portfolios:
- After the sale of the stock 1, you only buy the new stock, stock 5, for a value of 1500$ (for instance) and you keep 500$ in cash. This way, you make only one transaction, and you save on fees.
But, this comes at the two expenses: you have cash sleeping in your account, and you don't get exactly the same weights in the portfolio as we have. The performance of such a portfolio would be of the same kind as the one shown on our web site, but the numbers will not be exactly the same...

Do not forget also, that the returns shown on the site do not include transaction fees.
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bryanmcn
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« Reply #2 on: February 21, 2007, 02:46:17 PM »

OK. This explains how to re-allocate funds after a sell order. How do you free up funds to purchase if you have no cash and a buy order is issued with no sell order?
Is it the same concept in reverse?
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LuckyWon
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« Reply #3 on: February 21, 2007, 05:26:26 PM »

Here's what I do:

I am never fully invested as is recorded by the SSP portfolio returns, as I use the practical approach suggested above for buying.  However, in situations that you are asking about, I allow myself to use margin.

For instance, if you are just starting out here, you may find that a certain portfolio seems to carry about 5 stocks on average, and you have $5000 to start.  This means that you have $1000 for each stock.  I would wait for a new buy signal and purchase $1000 of that stock.  So you won't be fully invested until there are at least 5 new recommended buy signals. Providing you don't get a sell signal for one of those stocks prior to the 5th stock buy signal.

Since some of the recommended stocks are thinly traded, I feel more comfortable buying in blocks as I feel they are easier to sell when its time to get out.  Others here may feel different.  So in this case I would buy a block of shares that is closest to $1000

Now what happens if you have all your money invested in 5 stock and there is a new buy signal?  You need more money!!  I use a margin account for this situation.  Due to the volatility of these portfolios you need to be careful here, and not get too margined.  But in this situation, you currently hold 5 positions that lets just say are now worth $5300.  So to buy a weighted amount you need $5300 / 6 stocks, or just over $800

So at times I will have cash sleeping in my account, but at other times I will be margined (hopefully leveraging my returns), so one helps to offset the other.

Luckywon
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« Reply #4 on: February 21, 2007, 05:39:13 PM »

Hello bryanmcn,

Indeed, in case of a new buy order with no sell order, the reverse concept applies.
So, you would sell a portion of each stock on hold to free up the cash to make the new buy.
After these operations, once again, the weight of each stock should be proportional to the performance recorded since on hold in the portfolio.

Again, this is the theoretical calculation we do to get the performances we publish on this web site; a more practical approach may be more appropriate to small accounts.
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