Monday, April 28, 2008

Today's Trades

I closed 3 positions for a loss today, CHS, GGC, & SHFL, as a result of my new review process based on fair value, margin of safety, and yield on cost. These positions were closed for the following reasons:

1. The companies had their fair value lowered more than once since they were purchased, indicating a fundamental breakdown in the company.

2. My adjusted cost basis for each position was at or above the current fair value price, which provided no margin of safety.

3. The stock prices had fallen below $10, which made it very difficult to sell sufficient premium to satisfy the yield on cost requirement.

In hindsight, if I had used this review process earlier I would have closed these positions a long time ago and probably wouldn't have suffered such a large loss on each position. Lesson learned!

Fortunately, I limit all of my positions to a maximum of 5% of total capital. These 3 positions represented between 1-2% of total capital per position, making the combined loss less than 3% of total capital. This is why position sizing is critical. I could have further reduced the loss by going through this review process before averaging down on each position. Had I done that, I might not have invested more funds into these positions and may have just closed them. Another lesson learned!

On the bright side, now I have a better process for deciding whether or not to average down and to weed out under performing positions. In the future, I won't hesitate in closing a position, even at a loss, if it fails to pass this review, just like I didn't hesitate today.