The “Plug & Play Portfolio Stocks” represent investment ideas from our “Very Short List” that are near buy zones as of the first week of the new quarter.
These are NOT model portfolios to be jumped into right now! There is no such thing. Rather, this is a guide for monitoring your intermediate term position trades (measured in quarters and years) in stocks.
The “Plug & Play Stocks” should be monitored weekly, with more attention during periods of higher volatility.
As always, we are seeking great and potentially great stocks. There is never a reason to accept individual company risk without large upside. We can buy ETFs for good upside with around average risk.
To make things easy to look at and build towards, you first need to determine how “invested” you will be in the short-term. Because we do not all have the same financial circumstances or risk tolerances you must first decide if you want to be fully invested right now.
So, the first question for you to answer as you build your portfolio is this:
How much of your investable assets do you want invested right now?
Each Plug & Play piece will have a set of cash levels for you to consider holding in the short-term (weeks to several months). For lack of more creative words, I call these levels:
- Defensive – for those who are willing to miss short-term gains due to concerns about market risks.
- Cautiously Optimistic – for those who want to make most short-term gains, but want to keep some dry powder for “black swans.”
- Pedal To The Metal – for those who want to almost all-in, almost all the time, and can tolerate high volatility.
Sample cash ranges:
|Investor Category||Defensive||Cautiously Optimistic||Pedal To The Metal|
|Current Cash % (Tactical)||50-40||30-20||15-10|
|Long-term Cash % (Strategic)||12-4||4-2||2-1|
It is very rare that any investor would ever be more than half in cash. Typically 40-50% cash is the most any investor should ever hold. Remember, the stock market goes up about 3/4 of the time, with most corrections being short and shallow times to buy the dip.
A few times in life when there are great unknowns, an investor might go 75% cash. However, this should be based on the possibility that your standard of living could be threatened by an event, not that you are trying to predict things or are just fearful. In those situations, we must be humble and control our emotions.
We must remember that stocks tend to go up the longer we hold them. Thus, we should always try to find a way to gravitate to our lower long-term strategic cash levels.
You will want to read the Building & Managing Your Portfolio piece in the Getting Started list, which is quite a bit more expanded. This article is a simple way to handle stock entries.
When selecting a stock to buy you will not buy all at once. You will start a scaling in process that is based on two things:
- The stock appears undervalued to its current and forward intrinsic value.
- Technical levels, which measure investor sentiment, appear to be signaling a bottoming process or the early part of an uptrend.
Scaling in is done at different lines on our technical charts. I use an orange box to represent where I am expecting price to go and become attractive.
The top orange line is about where I’ll take a starter position if downward momentum seems to be dissipating. For example:
I would add a lot more at the bottom orange line.
You can certainly buy above the orange line, however, in general, that does not give me personally enough margin of safety (sort of the point of investing).
Below the bottom orange line are “bottom fishing” or “back up the truck” or Armageddon prices. Down there we need to control our emotions, put on our big kid pants and saddle up to rustle up shares.
As always, buying a stock always is dependent on whether something fundamental has changed at the company. So, absent a negative fundamental change, we want to buy when everyone else is panicking.
Here is how I usually scale into a position:
- Buy a 1/2% to 1% of my portfolio value near the top orange line.
- Sell a cash-secured put so that the strike price minus the premium nets out to a price near the bottom of the orange box.
- Buy more near the bottom orange line.
You can certainly start buying stocks higher in our buy zones, i.e. near the top yellow box, but higher is more aggressive. Is that you?
GTC Limit Orders
I use GTC limit orders for almost all of my trades. I set or adjust them once a week and sometimes twice if volatility demands it. There is no need to watch 7 hours per day with alert systems and technology what it is today.
Once you have a position, you might want to place a trailing stop. Remember, we are position traders, so, we are intending to hold these positions a while. I usually do not place a trailing stop until I have at least a 2% position in my portfolio.
For stocks, I set a wider trailing stop of 12% and usually only against 1/2 to 2/3 of a position. I generally always want to hold onto a starter position unless a company’s thesis has changed, in which case I just sell it all. But, sometimes I miss things or the market has unusual volatility – usually an event driven crash. In either case, a trailing stop against a portion of position is protection against my fallibility or a crazy stock market.
Closing Investment Thought
Always remember who you are as an investor. Changing your approach is generally a bad idea. Your circumstances don’t change fast, so neither should how you invest.
Being patient and taking a slow handed approach to investing is what has worked for the greatest investors in the world and copycat me. You don’t see any day traders in the billionaires lists and only a few that swing trade with any regularity. Slow, steady and measured wins the race – usually much faster than you think.
I focus on growth and cash flows above all else on the fundamental side. Again, that’s what the greatest investors do.
To the extent I seek dividend income, it is because the companies can support a growing dividend payment from their growth and cash flows. I do not chase yield and neither should you. Seek real quality.