6 - 2 and Even
This odd phrase got some popularity in the Boston area some years back due to its use by eccentric Red Sox manager Joe Morgan in the 80's. The origin of the expression is unclear*, and he note that he just liked the sound of it.
But, we can relate some of it to investing and portfolio management. First though, I'd like to comment on another expression, specifically, 'Sell in May and go away'. Last year I did indeed increase my cash positions as we entered May, and redeployed over the summer, and it did give me a little extra gain for the year. This year, with QE2 ending soon, sell in May also seems obvious, but … perhaps a little too obvious. Such are the pitfalls of being a behavioral investor. I expect to have some cash, but I won't be widespread selling (to > 25% cash or so in the Helical port) I don't think.
Unless, … 6 - 2 and even.
See, I am fairly convinced that there is a significant correction coming, I just don't know when or what will kick it off. I'm a little surprised the tsunami in Japan didn't have major ripple effects throughout markets. But with QE2 ending, and the EU having member debt issues, and citizens increasingly unwilling to guarantee (bail out) financial misdeeds, asset value inflation, oil prices etc. -- dark clouds seem to be gathering. Here in this healthcare focused space, increasing pressure to address unsustainable past growth in the cost of healthcare via legislation is another concern.
But back to the expression. In his 2002 book, 'Come into my Trading Room', (and probably earlier works too) Alexander Elder included a chapter on financial / portfolio management, noting that it was often what separated successful traders from those that failed. The book is full of some very basic good sense advice for investors, so is worth a read for investors and traders in my opinion. To overly summarize his guidelines for trades, he noted 'lose no more than 2% to any one trade and 6% for the month'. So I'll call it 6 - 2 - and try to stay even (the even is hard to fit in there).
At the end of April the Helical port stood at $57,268.44 (it is about $800 lower right now). This is up ~ 14.2% year to date, and truth be told, better than I expected for 2011, which I thought would be a tough year (and not bad given my stupidly selling Kendle - LOL). I want to try to protect those gains as best I can.
So, 2% on any one trade is ~ $1,450 starting with the monthly close. I'll be looking to avoid losing this much on any one holding. I won't be setting stop losses necessarily, but noting the price per share where this could occur. With 13 current holdings (I'll get to them) this isn't all that likely. It would require a 25% or so drop from the largest holdings of Cepheid and Medco, and nearly 50% from the smaller ones Athenahealth and Amedisys. Overall, a 6% drop in the portfolio is a more likely scenario, which would be a drop to only $54,000. Should this occur, and it may well, I will indeed raise some cash. I won't be selling all, since I do consider myself more an investor than trader, despite the high activity I will have in this account, but the more speculative holdings would go. The foundation holdings of JNJ, NVS, CVS, CAH would probably stay (should JNJ get near to or over $70, I'm incined to take some gains). The long term speculations of Exelixis and Seattle Genomics would stay too, as volatility is expected here. But Amedisys, Athenahealth, BioReferenceLabs, Cepheid, Genomic health, MAKO surgical, and Medco would all be up for consideration (but not automatic selling). And of course, anything I recently talk about is off the table for a time (Fool rules).
As for the port itself. Since I last updated on 4/4/2011, there have been a few changes. Dividends received were from Novartis ($76.81 after tax), CVS ($12.50), and Cardinal ($13.65). I love the dopamine rush of a nice dividend. I added back CVS on 4/7 (100sh for $3,568.82) and MAKO surgical on 4/28 (200sh for $5,426.99). I need to know more about MAKO, and may simply be trying to recreate the magic that was Intuitive Surgical with a less then comparable related asset -- but we'll see. I very recently on 5/3 let go of Cerner (25 sh for $2,969.95).
Cerner had a very good quarter. As a high P/E company with momentum behind it, I'm content to take gains and revisit should it come back. It had high short interest going into the quarterly, and was thus the only company I owned that had a stop loss on it (always dangerous). Instead it went in my favor, and I'm going to take that cash. I didn't have a lot in it but overall this was 21.1% gain since 2/24 so I'll take it (113% annualized). Yes, it is higher today than the ~ $119 that I sold it at, and I should have been quicker to pull the trigger after earnings. Should it revisit its 20d exponential moving average (today is just under $115) I will likely revisit. This kind of trading isn't typical for me, but Cerner was always a momentum play so treated more as a trade than an investment.
6 - 2 and even.
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* Googling about, I'm inclined to believe the expression likely has its roots in horse racing odds i.e. win, place, show at 6 - 2 and even.