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Jim,

I understand the theory about buying a stock in increments--it allows you to take advantage of a lower price without going over your target allocation of the stock in your portfolio. I have done the same, but have a real problem filling out my allocation if a stock goes up. I wait for the stock to go down, but sometimes it doesn't and it gets away from me. I can see that if I had made purchases even at an increased price I very often would still have made money on the stock, but I couldn't seem to make myself do it (sounds like a personal problem, I know).

I notice that in some cases you have purchased stocks for this portfolio that have increased in value from your original purchase.

Do you have a range-- + or - a particular percentage of your original price that you use as a guideline for additional purchases? Maybe considering time passed before you take a second bite? Or maybe you have a "Buy Below" price in mind when you make your purchases? How do you decide that an increased price is still doable?

Love your portfolio.

Thanks,
Bikerliz
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I have done the same, but have a real problem filling out my allocation if a stock goes up. I wait for the stock to go down, but sometimes it doesn't and it gets away from me. I can see that if I had made purchases even at an increased price I very often would still have made money on the stock, but I couldn't seem to make myself do it (sounds like a personal problem, I know).

I notice that in some cases you have purchased stocks for this portfolio that have increased in value from your original purchase.

Do you have a range-- + or - a particular percentage of your original price that you use as a guideline for additional purchases? Maybe considering time passed before you take a second bite? Or maybe you have a "Buy Below" price in mind when you make your purchases? How do you decide that an increased price is still doable?


Hi Bikerliz,

What you describe is a problem almost every investor faces, so don't think it's just you. It arises from anchoring -- fixing upon a price and then judging everything from that price. If a later price is lower, then you're getting a bargain and it's a lot easier to buy another portion. However, as you've noticed, if a later price is higher, it's much, much harder to buy some more. This hurts us as investors because, also as you've noted, those higher-priced purchases can still be great investments.

What I'm doing to help avoid that anchoring is to look again at the expectations priced in at the new, higher price. If they're still well below what I believe the company can do, and if the rest of the thesis remains intact, I'll go ahead and buy some more. In other words, I'm trying to judge each investment decision on its own merits, not in relation to when I first noticed the company or first bought it..

Anchoring is something that is really easy to do and quite hard to avoid. With practice, and certainly an awareness of it, it can be mitigated, though probably not eliminated. As I wrote, look at each purchase as if it were a fresh, brand new decision and is in no way related to any previous decision. (Actually, that's truly the situation.) Think about each decision independently on its own merits and you'll find that anchoring, while still present, won't stop you as often. At least that's what works for me (and I'm still working on it).

Cheers,
Jim
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Jim,
Thanks for the advice. You are right of course. Easy to say and hard to do, but I will make the effort.

Bikerliz
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Great and simply put....

What I'm doing to help avoid that anchoring is to look again at the expectations priced in at the new, higher price. If they're still well below what I believe the company can do, and if the rest of the thesis remains intact, I'll go ahead and buy some more. In other words, I'm trying to judge each investment decision on its own merits, not in relation to when I first noticed the company or first bought it.

How do you force yourself to "start over" each time in how you look at a stock you already own? Curious how you actually do this (i.e., block out the history)!

Joan
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How do you force yourself to "start over" each time in how you look at a stock you already own? Curious how you actually do this (i.e., block out the history)!

Hi Joan,

Long time no see! :-)

In reality, I find that I cannot. I know I've purchased the thing before and that does influence my thinking about a second purchase. But what I try to do is to look at the new purchase with fresh eyes. I use my process of checking the priced-in expectations, catch up on any information that's come out since I last looked (I keep notes of each company), etc. Has anything changed to the thesis. Is it proceeding or has trouble cropped up? And so on.

If the expectations are still messed up, even if they're higher than when I first purchased, and the thesis is still intact, I'll probably buy some more.

Note, though, that this is not an automatic thing. GameStop, for instance, in my MUE port is probably not going to get a second purchase unless I see improvements in the margins (which I haven't yet, if I recall the latest earnings correctly). Similarly, Supervalu is going to remain with a single purchase. On the other hand, several have seen a second purchase and a couple of have seen a third purchase (and I have at least one more planned for that). I'm doing this to deal with what I perceive as risk. The most risky choices will stay at the single purchase (2%) level, while those that I'm most confident about and believe have the lowest risk will see 4% and 6% positions (percentages based on purchase amount, compared to original portfolio target funding).

Of course, the ones that have done the best in this port are those very risky ones. http://www.fool.com/specials/risingstars/rising-stars-jim-mu... Ha! But that success doesn't mean that I'm going to put more money into them, as I still believe them to be pretty risky. That might change in the future, but not yet.

Cheers,
Jim
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Thanks for sharing your thought process. It is reassuring to hear this:

In reality, I find that I cannot. I know I've purchased the thing before and that does influence my thinking about a second purchase. But what I try to do is to look at the new purchase with fresh eyes.

and especially this:

Note, though, that this is not an automatic thing.

Joan
who is a consistent lurker here:)
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One thing I would add to this discussion on anchoring and purchasing additional shares for stocks that continue to rise is to not focus solely on price. Note some of the measures of valuation like P/E or P/S at the time of your original purchase. You will frequently find that a stock has risen 20% (just to pick a number) from your initial position but that it's valuation remains comparable. If earnings and revenue have also increased by 20% over the same period, then you are getting equal value for the purchase even though the price is higher.

That's what TMF1000 is looking at when he talks about picking up shares at better valuations. If two weeks after your original purchase, nothing has happened (like an earnings report), and the stock drops 10% it's pretty easy to see the better valuation. However, adding a stock 6 months or a year later may be just as attractive, but you might have to look beyond the price to see it.

Doug
SA Home Fool
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Given a problem with anchoriing, my answer was to keep a dual spreadsheet based watchlist. The background one deals with enough key statistics to estimate whether a company is likely to do well as a company. Companies that do well on that one get copied to a second. So do ones showing a good opportunity, such as AXPW.OB or MNHVF. The active watchlist deals with current prices relative to the high and low prices of a given stock for the past two year. There is an adjustment for the buy price column, one for the sell price column, and an individual adjustment for each company. The spreadsheet is set up to give me a suggested rank after the prices are entered on Saturday, and based on that, a suggested buy or sell price for each company. The column adjustments are made closer to the current price when nothing happens, and by a large jump away from it when a buy or sell is triggered. This gives higher odds of selling on the highs and buying on the lows. Most of the work goes into deciding what companies are good enough to go onto the background watchlist spreadsheet.
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