Redistributing Your Investing Capital

I wrote my response to Scott's note yesterday, but didn't get around to posting it for you all until now. Read on. (And I hope you all had a great Thanksgiving.)

Phil –

Thanks for a great book and thanks for taking the time and making the effort.  Your altruistic willingness to help others truly sets you apart from other market 'gurus'.

I've been a Rule #1 investor since September 6 and am already up 12.8% in just nine weeks.  I'd be doing even better had I learned discipline and patience.  Every time I've dabbled in a non-Rule #1 trade, I've been burned.  Hopefully, I've learned my lesson.

My portfolio has grown close to $100,000 and I've been owning five companies.  My question: What to do when I'm fully invested and the signals turn green for another company on my watch list of wonderful companies?   Should I redistribute my investments to have an equal investment in each of the six companies?  Or should I just wait until I get sell signals for one of my companies and then patiently wait to buy on the next set of green signals?   

Again, thanks for all you do, Phil.  You're a stand-up guy!

Scott Dwyer
Roswell, GA

My response:

Hi Scott,

It's late on Friday after Thanksgiving and I can't sleep.  I stuffed myself with turkey sandwiches after watching my 12 yr old nephew play two hockey matches at the local rink against teams from Montana and St. Louis.  It's great to be with family and I hope all of you had as great a Thanksgiving as I did.

My only missing piece was one of my daughters, whose volleyball team
won the Ivy League a couple of weeks ago, which meant, among other
things, that her whole team had to stay at school and practice for the
NCAA's.  She did Thanksgiving with her team at the coach's house and
with us over the phone.  All of this to say that I really hope all of
you are finding your way to financial liberation and that the Rule #1
revolution is helping.  Just remember to take this one baby step at a
time.

Anyway, Scott had a good question.  He's fully invested and up about
12% in a few weeks.  No reds to kick him out of his stock, but another
one on his Watch List just got the third green.  Should he sell some of
the first stock to buy into the second one? He's in for about $100,000.

Answer:  I do it both ways.  It depends on how close my first stock is
getting to its Sticker Price.  If it's climbing up toward the Red Zone
(within 20% of Sticker) I would sell off half and put that into the new
one that just turned green.  If my first one is well under the Sticker
but leveling off in price with one red, I might do the same thing.  But
if I'm way below Sticker and the price is climbing I'm staying with it.

You are definitely going to run into this a lot.  I have maybe 20
stocks on my Watch List that cover a range of industries.  When the Big
Guys get out of one area of the market they often are getting into
another area.  This is called Group Rotation and it's a great reason to
have 4 or 5 stocks in different industries so that something is going
green when something else is going red.  That said, I often find that
nothing is going green on my list and I'm in cash.  This happens a lot,
too.

So let's say you are in cash and have 5 stocks on your Watch List.
The first one goes green.  How much do you put in there? 

I look at the
direction that the others are headed and where they are with the
arrows.  I then split up the capital into 2 to 5 piles depending on how
many I think are going to pop in the next week or so.  (After a while,
you can see the changes coming well ahead.) 

If only one is looking
good, I'll put in about half and hold the rest for the next one.  (Part
of the reason for that is that often when only one is good, that means
the market as a whole is being disinvested by the Big Guys and they are
going to cash instead of rotating the money into another group.  If
that's the case, cash is king anyway.). 

This, by the way, is one of
the reasons that you can get a 50% return and only have a 15% to 20%
return on your whole portfolio — because a big chunk of your money was
sitting in cash waiting for something else to go green.  Nothing wrong
with that.

If this sounds a bit loose, it is.  I don't really have a hard and
fast rule about how much to pop in there.  But when I think about it,
my willingness to commit heavily into one stock depends on how liquid
it is (Can I get out quickly without effecting the price?) and how
undervalued it is — and whether the big guys are really pouring the money
in.

Don't worry if you miss some great run-ups in businesses that you
have on your list.  You'll catch another one down the road.  The main
thing is that you are recognizing a great business at a great price and
you are using the tools correctly and making a great return.  You'll
catch on to the fine tuning as time goes along.

Now go play.

Phil