Position sizing, war chest, volatility, nibbles and gobbles. (What to do as the Yuan devalued and stocks crashed?)

I have been inundated with messages in various forms from readers on how depressed they are or how they are in distress over the state of the stock market. 

There is something I say from time to time and I am pretty sure I have said it in my blog somewhere before:

"Investing in the stock market is like getting into a relationship with another person. If we expect it to be only a bed of roses, don't bother. There will definitely be rough patches."





So, during good times, everyone is happy. During bad times, those who are still able to keep their sanity and even stay quite happy are the ones who have 

1. appropriate psychology, 

2. appropriate money management skills 

and 

3. appropriate investment allocation framework.

Recently, on FB, I shared how a reader accused me of not sharing important ideas on position sizing until quite recently.

I have more than 2000 blog posts spanning a period of almost 6 years and it was quite possible that the reader might have forgotten more than a thousand of my older blog posts.

Anyway, this was what I shared:

Chatting with a reader in FB, he said that I only started talking about position sizing last year. Why didn't I talk about it sooner? Apparently, quite a few people bought stuff I talked about and some "showed hands", if you know what I mean.


Only last year? I don't think so.







Anyway, I searched my blog's archives and went through the 2,000+ blog posts. I am sure I talked about position sizing from time to time in my blog's early years although I might not call it "position sizing".

Well, my blog was founded in December 2009 and here is a blog post from February 2010:


See: "It is, quite simply, a question of proportion."

Only last year? Definitely not.

This leads me to how I recently had two blog posts which were basically conversations I had with two readers who were feeling rather despondent. They were just two of several emails I received from readers but they are enough to give us an idea of how some investors might be feeling now.






In both of my replies, I advised that they might want to consider "Eating Bread With Ink Slowly."  (See related posts 1 and 2 below.)

I also received messages asking me what am I looking to buy, what am I buying now and whether I am nibbling or gobbling? Well, I have side stepped most of these questions. 

This is a blog, my blog. I am merely talking to myself but people follow my actions and I have been stunned before by what some actually did and, later, said.

Don't understand what I am saying?

Well, it is like someone who decides to get into holistic living but because eating right is the least demanding bit about holistic living, that is all he decides to do. 

Then, he picks what he likes about eating right and it becomes eating wrong. 





Why do some people who eat a bit of junk food now and then look healthier than he does, he wonders?


See what I am trying to say?


I invest primarily for income. Investing for income has provided me with a passive income stream during good times and bad times. It is very comforting and that definitely helps to keep me sane.

I have invested in some stocks which have not done as well in terms of their stock prices but if their businesses are humming nicely and if they continue to pay me, I am happy enough.





I have invested in some businesses which are facing tough times but because I have sized my investments in these businesses according to my own circumstances, even if it would mean a total loss, if it should happen, it would not be a financially crippling experience.

I know what I am buying (most of the time). So, I am quite comfortable even if their stock prices go down and, in some cases, I am even looking to buy more.

So, what have I been doing?

Well, I have been nibbling some of this and some of that. Why? 

With lower prices, some stocks looked more attractive. What if prices were to go lower? 

Then, they would look even more attractive or were you expecting me to say that I would go into a depression?

Of course, prices could go lower. However, prices could also turn and go higher.





Our job is not to anticipate what Mr. Market is going to do although I try to engage in a conversation with my schizophrenic bowling ball from time to time. 

Our job is to have a plan on what to do if Mr. Market should do something. So, if something were to happen, we act. 

We can prepare but not predict. So simple, right? Simple but not easy for many.

Let me see if I can throw some light on the matter.







In market corrections, we might want to nibble if we think stocks look relatively attractive. 

Corrections are defined as declines of less than 20% from the top and prices move higher after corrections. 

What we saw up till the last trading session could be a correction. So, selectively buying made sense to me. 

If prices were to recover and move higher, good for me.

What if it wasn't a correction? What if prices were to move lower and we moved into bear market territory which would be a decline of more than 20%?





Well, then, we would be glad that we had been nibbling and not gobbling. Then, we would be glad that a big portion of our war chest is still intact. 

Our nibbling activities should not have consumed more than a quarter or a third of our war chests.

In a bear market territory where there are plenty of screams and cries of blue murder, where there is plenty of blood flowing in the streets, this is where we might want to sit tight and wait for the dust to settle. 

There will come a time or a few when the quiet returns.







Then, we might want to go and take a look. Of course, if we still have some funds left for nibbling and would like to nip into the streets while the blood is still flowing, that is OK too. 

Hey, who am I to deny anyone their spirit of adventure?

In closing, I would say that for those of us who get heart attacks from seeing prices plunging, we are probably more into prices than values. 

It could also be that we have been bad with money management and used up all our war chests too early. 

It could also be that we have sized our positions badly and we are stuck with having too much of one bloody stock (from bleeding and not profanity). 

You know what I mean?





Whatever it is, look at a bad situation as a learning experience and try to do better henceforth.


Alamak, have I been talking to myself again? 

I am so sorry.

Related posts:
1. Feeling depressed about paper losses?
2. Anything uplifting to say as stocks bleed?
3. Nibbles, gobbles, values and prices.
4. Be comfortable with being invested.
5. Managing exposure in investment portfolio.