Sunday, August 26, 2012
I consider my IPO purchase of Facebook (FB) to be a contrarian move because the stock behaved differently than the conventional wisdom at the time.
I wasn't initially planning to buy but, from what I had read and from talking to other people in high technology, everyone expected Facebook to soar at the opening. I know someone, a senior executive at a high-tech company, who placed a limit order at the open to not buy over 55. So, he expected it to pop.
When I saw that it didn't soar like everyone predicted, I decided to buy it.
I thought it would increase over the next few days/weeks. As we now know, it didn't. Instead, it is down about 50%. Even though I didn't expect this, I am ok with it.
Because my system diversifies, and each individual position is re-balanced yearly, I feel safe sometimes taking a risk on stock.
I will rebalance my Facebook position at the end of the year. Even with Facebook's performance, my portfolio is up 11% for the year.
I don't use any stop losses with the Stock Trading Riches system - other than replace a position if I feel that there is something fundamentally wrong with the company. In my book, I list an optional stop loss rule in the section about customizing my system. It calls for replacing a stock if it declines 50% (or X% - it can be customized) from the initial buy. I state in the section that I don't use this rule myself, and it would have prevented the performance in the AMZN stock example in my book.