How many active positions at one time should I have? (February 7, 2002)

  That is a hard question to answer because there are many variables, the most important being do you have time to track and monitor what is going on. One of the problems less experienced and experienced investors alike have is too many outstanding investments that cannot be monitored properly: where should you sell, where put the trailing stop loss, what is the target, etc. With more experience comes the ability to look at things a bit less emotionally and just enforce your buy points, target points and stop points. You can handle more plays at that point.

One problem when the market is trending well one way or the other is the number of good-looking investments. You see them setting up and want to take advantage of each of them. While you can divide your money up and do that you have the problem of monitoring too many plays. If something happens in the market that changes the field a bit, you may not make the correct decisions to cut and run or you may not see it because you are stretched thin looking at the particulars of your own stocks. You need to do that, but you have to look at the overall market as well. I know. I have been there with a lot of option positions on many different stocks and indexes all at once. It gets hairy keeping up with them, and then emotion can start creeping back in. The market changed but I was focused on past patterns and not looking at the changing winds. I lost big time. Lesson learned.

One consideration is whether you are looking at long term investments or shorter term trades. You can run a number of longer term positions that you will hold for years if they will let you and at the same time have shorter term trades. You monitor the longer term positions to make sure price/volume action is good, the trendline is in tact, etc. You can still get spread too thin even with these however. Also, we like to focus assets in the bigger winners as they continue to prove themselves and give new buy points. That is one way we limit the number of long term positions: sell the laggards and put more into the winners. This goes against the dogma you are hearing from Congress about diversification, but if you hold a ton of stocks you are basically a mutual fund. Mutual funds usually insure mediocrity. "Investment professionals" as we hear from Congress keep no more than 10% in one stock not because of prudence, but because they fear being sued if something goes amiss and they do not cut their losses. I would rather have 50% of my money in ACS when it broke out and made its big run and then sell when it started to climb over its upper channel and then began to fall than have a mutual fund that lost 20% last year or gained 10% for the entire year.

In certain market conditions it is good to get to know a few stocks and trade them consistently. You know them and know the trend and can make money playing the trend over and over. That gets to be a problem, however, when the trend breaks, yet you are emotionally attached to your 'old favorites.' There is that emotion coming back in to the picture. Know your stocks well, but don't get emotionally attached. The stock does not love you; it does not know you. It is a tool to make money. Use it as long as it is doing so. When it starts to falter, jettison it.

With all of that in mind, try not to get too many irons in the fire at once. I run more trades because I have done it a long time. When I developed my system through all of the losses and bruises, I was best with a maximum of about 5 short term (days to weeks) trades. I would pick stocks that were in good patterns and/or in strong trends and play every move. Keeping up with them was easier, and I could watch the whole market. If a trend changed, I would take my money off the table or drop it if I had already done so and was waiting for the next move in the trend.

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