By The Sizemore Letter<\/u><\/p>\n
My style is a little different from most contributors to TraderPlanet.\u00a0 At heart, I\u2019m a value investor, and my holding periods for quality stocks can be months, years, or even decades under the right set of conditions.<\/p>\n
This is not to say I\u2019m an ideological believer in \u201cbuy and hold\u201d investing, however.\u00a0 Absolutely not.\u00a0 But I am a big believer in letting a solid investment thesis play itself out.\u00a0 If a stock is attractively priced and I judge it to have appealing prospects going forward, then I feel no need to sell it simply because it has enjoyed a recent run-up in price.<\/p>\n
But while my approach to the investing process is different from that of a short-term trader, I\u2019m a big believer in a concept that many successful traders follow: scaling.<\/p>\n
When you scale in or scale out of a position, you enter it and exit it in stages rather than in a large lump sum, and there are several reasons why this is a good idea.\u00a0 By taking a small initial position, you can test out an investment idea before committing a large sum of money to it.\u00a0 This was a favorite tactic of Jesse Livermore, the legendary trader who was the inspiration for the fictitious biography The Reminiscences of a Stock Operator<\/i><\/a>.\u00a0<\/strong><\/p>\n For me, it is more a case of managing my psychological temperament.\u00a0 Nothing is more frustrating to me than committing a large allocation of my portfolio to a well-researched position only to see it take an immediate nosedive.\u00a0 I may eventually prove to be right, and the trade may still end up being as profitable as I hoped.\u00a0 But seeing a new position in the red rattles me and distracts me from the task at hand of managing the overall portfolio.<\/p>\n It is also a way for me to split the difference during times of indecision.\u00a0 If a stock looks fundamentally sound and attractively priced,\u00a0 my head tells me to buy.\u00a0 But if a stock has already had a large run-up or if the market doesn\u2019t \u201cfeel\u201d right, my gut tells to wait.\u00a0 When I have a conflict between my head and my gut, I split the difference by entering a position in increments. \u00a0If the stock continues to rise, I have exposure.\u00a0 But if there is a pullback, I also have my powder dry to take advantage of it.<\/p>\n The same is true of exiting a trade.\u00a0 I hold several positions I\u2019d love to hold forever.\u00a0 But now and then, one of those stocks will get a little on the pricey side, or the position will grow to become too large relative to the rest of the portfolio.\u00a0 In these cases, it makes sense to take a little money off the table.\u00a0 A trader would call this taking profits; an asset allocator would call it rebalancing.\u00a0 I call it being prudent.<\/p>\n I\u2019ll leave you with an example.\u00a0 Mortgage REITs recently took a beating in the market, as investors feared that a hike in bond yields would wreck their book values.\u00a0 I took the view that any reduction in book value was already reflected in the stock prices of the REITs; as a group, they traded well below their stated book values.<\/p>\n But after the bloodletting in the sector, my gut felt queasy about allocating a large chunk of capital to something that volatile.<\/p>\n Splitting the difference, I\u2019ve been averaging in to the UBS E-TRACS 2x Mortgage REIT ETN ($<\/span>MORL<\/a>) <\/b>over the past month.<\/p>\n Incidentally, I recommended mortgage REITs<\/a> in TraderPlanet three weeks ago.\u00a0 I\u2019d like to reiterate that call today.<\/p>\n Disclosures: Sizemore Capital is long MORL. \u00a0This piece first appeared on TraderPlanet<\/a>.<\/p>\n