"An investment in knowledge pays the best interest." - Benjamin Franklin




Price Discipline

A couple of notes on the mechanics of my discipline of setting the various stock prices I use

  • 1.

    My discipline dictates that I always have one buy price and two sell prices---one as a Stop Loss if the price declines following a Buy decision and the other the stock price at which we take profits.

  • 2.

    Since the stock price disciplines are determined by a long term channel, the prices at which I buy and sell stock are moving all the time. So, for example, the buy price for Proctor and Gamble will be continuously moving upward over time. That means that on January 1, my Buy Price might be 56 but by September 1, it might be 58 or 59. The same holds true for both of our sell prices.

  • 3.

    When a buy stock price is reached [that is usually when the price is within 10% of the actual buy price as determined by our discipline], I initiate a buy recommendation. To achieve stock diversification, my initial position in each company is equal to approximately 3% of the total value of the portfolio.

  • 4.

    The stop loss price has a very simple purpose—to avoid big losses of capital. There is nothing magical about our stop loss policy vs. anyone else's. But in our opinion, it is absolutely critical in any investment strategy to have a stop loss discipline. When you really consider the range of possibilities, there are only four things that can happen to the stock prices of companies after you make a purchase:

    • They can go up a lot- 20%+,
    • They can go up a little- 0-20%+,
    • They can go down a lot- 20%+, or
    • They can down a little- 0-20%.

    My objective is to eliminate the third alternative from the investment process.

  • 5.

    The Stop Loss Price I set is tied to the buy price, not the current price. As an example: If the buy price of Proctor and Gamble is 56 and i buy it, my stop loss would be 49 at the time of the purchase. If Proctor and Gamble’s stock rises to 70 in 90 days (I should be so lucky), my  Buy Price might still be at 56 and therefore the stop loss will still be at 49. In deciding whether or not to subscribe to this service, it is very important to understand—I am not a trader. So I don't believe in keeping a Stop Loss Price rising with the stock's price because:

    • The basic premise of this strategy is to own a rising dividend stream. As long as the company that  the stock represents continues to meet this condition and remains fundamentally sound,I am a committed long term holder of the stock,
    • Too much trading frequently results in missing huge long term price rises,
    • Remember those transaction costs.

  • 6.

    I love to hold the shares of a company over a long bull cycle. For that reason, when a stock reaches its ‘take profits’ sell price, I only sell one half of the holding. This has the effect of taking my original cost out of the stock, but letting our profits run. I hold the remaining shares as long as the company meets the original fundamental screens.

  • 7.

    The Sell Discipline I believe is the key to attaining investment success.  In fact I would not be overstating the case to say that knowing how to sell is infinitely more valuable than knowing how to buy.  Why? There have been numerous studies that demonstrated that a portfolio comprised of randomly selected stocks more often than not outperformed a portfolio of stocks selected by a professional money manager.  In other words, anybody can buy a stock.  It is the real professional who knows how to sell it so that [a] the portfolio doesn’t sustain large losses, [b] stocks have the opportunity to achieve their maximum profit potential [c] while insuring that at least a portion of profit is captured.