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Nuts and Bolts of Portfolio Management

Nuts and Bolts of Portfolio Management. Mike Cintolo VP of Investments and Chief Analyst Cabot Market Letter, Cabot Top Ten Trader mike@cabot.net. Why Important?. We’re all Portfolio Managers! Find the Right Techniques for you You’ve Owned many Mega-Winners before ...

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Nuts and Bolts of Portfolio Management

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  1. Nuts and Bolts of Portfolio Management Mike Cintolo VP of Investments and Chief Analyst Cabot Market Letter, Cabot Top Ten Trader mike@cabot.net

  2. Why Important? • We’re all Portfolio Managers! • Find the Right Techniques for you • You’ve Owned many Mega-Winners before ... ... but did you Handle them Properly? • Difference between 10% and 30% in a year

  3. Must Measure to Understand • No Tracking => No Learning • Three Legs to the Stool • Win Rate • Slugging Percentage • Both Ratio and Absolute size • Frequency (number of trades) • Look at Every Intermediate-term Cycle

  4. Positions Sizes & Loss Limits Two Methods: • Pre-set Size and Loss Limit (Model Portfolio) • Simple, usually Effective • Dynamic Method • More Volatile the Stock => Smaller Position • Avoid getting Knocked Out on “Noise” • Risk 0.5% to 2.0% per Trade

  5. Home Depot is Steady ... Even HD’s “big” pullbacks are only 8% to 12% => can buy bigger position, use tighter loss limit 11% 6% 9%

  6. ... but SunPower is Not! 24% in 3 days SPWR is extremely volatile => smaller position, looser loss limit 24% in 6 days 19% in 9 days

  7. Average True Range (ATR) Can Help 2.5x to 4x this number ATR = how many points stock moves around each day

  8. Position Sizing Spreadsheet Plan Your Trade, Trade Your Plan Stock Netflix (NFLX) Initial risk (%) 1.00% Buy Price 215.0 Initial Stop 190.0 Risk (pts) 25.00 Risk (%) -11.6% Shares to Buy: 40.0 Investment % 8.60% Investment $$ $8,600 Portfolio Value $100,000

  9. Trailing Stops • Stops should be your Worst-Case Sells • Think of them as Safety Nets • You can usually Do Better (Chart School!) • Many Methods • Percentage-based • Technical Levels (50-day line) • “Widening Method”  I prefer this

  10. Buy & Trail with “Widening Method”

  11. Portfolio Management Concepts • “Standard” System: Buy-and-Trail • What 80% of Investors do • Advantages: Simple, Few Decisions, Offense Immediately, Stock Selection Biggest Factor • Disadvantages: Risking All at the Start, Can give up Decent Gains, Winners/Losers Same Size

  12. Conservative Aggressive Concept • Same as Buy-and-Trail ... but take Partial Profits early on • Have Pre-Determined Profit Target • Usually ~ 1 times your Risk • If Loss Limit = 10%, Sell Some when you’re Up 10% • Aim for homerun on rest

  13. Conservative Aggressive Concept Even if Trade doesn’t Work Well, Can still Grind out Gains Partial Profits up ~ 3 points BUY at 28 Safety Net ~ 3 points below BUY Trade Failure, but still made $$

  14. Conservative Aggressive Concept Advantages: • Forces you to Sell Offensively • Good in Many Market Environments • Can actually help you Ride Bigger Winners Disadvantages: • All is Risked at the Start • Smaller Size on Big Winners

  15. Aggressive Aggressive Concept • Most Profitable & Most Challenging • Lots of Preparation, Resiliency • Determine How Much to Own ... Then Buy in Chunks • Example: 10% to start, then 5%, then 3% • Buy more Only If Stock Goes Up • Finish Buying within 1x to 1.5x Your Risk

  16. Pyramiding Spreadsheet $100,000 PORTFOLIO 0 R 0.5 R 1.0 R Stock Price 100 105 110 Open Profit @ 108 $760 Shares to buy 80 40 20 112 $1,280 Total shares 80 120 140 115 $1,700 $$ Invested $8,000 $12,200 $14,400 120 $2,400 Avg. Cost $100.00 $101.67 $102.86 125 $3,100 Safety Net 90 95 100 130 $3,800 140 $5,200 Open Profit $0 $400 $1,000 Risk of Loss -$800 -$800 -$400 Risk (% portfolio) -0.80% -0.80% -0.40% 1% equity profit $110.00 2% equity profit $117.14

  17. Aggressive Aggressive Concept • Want to buy $12,000 in 3 chunks: • Start with $6,000 • Add $4,000 • Finish with $2,000 Add $2K up 10% to 15% Add $4K up 5% to 10% BUY $6K on Breakout Result is a Big Position in a Big Winner!!

  18. Aggressive Aggressive Concept This can happen Often and be Frustrating! Add more up ~ 2 points BUY at 28 Safety Net ~ 3 points below BUY Trade failure, lost $$ despite initial upmove

  19. Aggressive Aggressive Concept Advantages: • Maximizes your Biggest Winners • Smaller Initial Risk • All you need is One or Two Outliers Disadvantages: • Skewed and Streaky • Lots of Preparation • Small Winners can be Wiped Out

  20. Summary • All comes down to Being Sound • Risk in Check, Maximizing Winners, Being Practical • Keep Testing and Experimenting • A new Trick or Two can help • No Perfect System • Spreadsheets Available by Request • mike@cabot.net

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