In our previous sessions, we’ve been training – isolating and practicing the skills you need to become a better investor. You’ve generated and evaluated a number of investment ideas, selecting the right Idea Watch List. So you’re looking in the right fishing hole. You’ve used your judgment to pick stocks and put them in your Best Ideas List. Then you’ve evaluated and refined your selection process – making sure you’re using the right bait.

When you start to see your Best Ideas List outperforming your Idea Watch List you have evidence your judgment is adding value to your investment returns. Picking the right stocks puts the odds in your favor - increasing your chance of beating the market. That’s the data that should give you the confidence to step up to the plate to start buying stocks even when the rest of the market is afraid.

Now we’re going to add trading to the process - knowing when to buy and sell and how much of your portfolio to allocate to each stock. These are the critical skills we need to add to your toolkit.

Timing: When to Buy and Sell
Now that you have around 20 stocks in your Best Ideas List, you’re ready to start buying and selling stocks with virtual money in your Marketocracy Investment Portfolio. The goal: to maximize your return on the ideas you’ve generated and the stocks you’ve picked by improving your trading skills.

Develop criteria for timing – disciplined approaches for when to buy and when to sell. Doing so will give you the ability to look for patterns that work. There isn’t one secret way. There are a myriad of ways. The key is to find the one(s) that work for you.

When to Buy
Once you identify a stock as one of your best ideas – you could simply buy them for your Investment Portfolio at the current market price.

Personally, I only buy stocks I expect to hold for at least 2 years and that I expect to see a “double.” A “double” means a doubling of the stock price which equals a 100% return in 2 years. If I cannot see a “double” then I keep looking because I know there are better ideas out there.

If you’re right 100% of the time, i.e., all of the stocks in your portfolio are “doubles,” then you would generate a return of 41% a year. Of course, nobody is right all the time. In fact, if you’re right only 60% of the time you would be considered a superstar investor and your portfolio would generate a return of approximately 26% per year.

If you’ve done a good job generating ideas and picking the best stocks, then the odds are in your favor that you’ve made a good investment. However, after all the effort you made to find a stock, don’t you want to maximize your return by knowing when to buy? Here are some criteria or indicators of when to buy.

Catalysts: Events that Change Forecasts
Many investors buy a stock because they get a hot tip from somebody that knows somebody that knows something about something. In reality, most tips either prove to be false or if they are true, are probably already priced into the stock by the time you hear of them. But don’t discount this approach entirely.

Although most, if not all, news and events are reflected in the price of a stock almost immediately, there is information that has impact on a stock that is not well followed or understood. This is where your firsthand experience can make a difference.

Legal decisions regarding lawsuits, anti-trust cases, criminal fraud, etc. can significantly impact a company’s value. The initial reaction to a company’s stock may be quite negative. Being able to decipher the evidence or arguments as it is presented can be difficult. If you have the ability to accurately predict the decision or assess the probabilities of the outcome – before it is final – you may have an opportunity to buy before the rest of the market.

Investing in an idea before the market recognizes the opportunity can be tricky. It helps to have a catalyst or trigger event that makes the outcome clear. Keep in mind - a great investment idea or stock pick is a bad investment if you’re the only one that recognizes it.

Target Buy Price: Fundamental or Technical
Knowing what price you want to purchase a stock at is an important discipline. Some investors use fundamental research to calculate a “value” for a company. They look at company financials and build pro-forma forecasts of the key assumptions that impact a company’s earnings and growth rate. Other investors use technical analysis to identify price trends by charting and analyzing the movement of a stock’s price and trading volume.

Stock Alerts: When the Best Investors are Buying and the Rest are Selling
Marketocracy has a different approach to analyzing trading activity on stocks. Anyone can see the total trading volume and the market clearing price on a stock. Only Marketocracy has the ability to segment the buying and selling activity on a stock by rank: the investing or stock picking skill of our members. We look for trading differentials by rank: when the best investors are buying a stock and the rest are selling, we call that a Strong Buy. A Strong Buy indicates that the best investors see fundamentals the rest of the market has yet to identify, but will. We believe these trading differences account for the superior returns of the best investors over the rest.

You’ll find other sources of trading data from Marketocracy’s members in our monthly newsletter, Marketscope. (Stock Alerts and Marketscope are Marketocracy Premium Research products being offered on a complimentary subscription basis through the end of September 2004 to program subscribers of our Become a Better Investor program.

When to Sell
Most investors are better at buying a stock than they are at selling. Perhaps it is because they put more effort into picking stocks. Perhaps it is because almost all investment advice is on stocks to buy – not on stocks to sell. This is a critical shortcoming.

Here are 3 scenarios I look for to tell me when to sell. Within each, it is important for you to establish a disciplined and repeatable approach. Then you can use the tools on our website to evaluate and identify the approach that works most effectively for you.

Full Value: Reaching Your Target Sell Price
When you buy a stock and it reaches its full value, you should start to sell. That is the happy scenario because your investment worked.

Setting a target price to sell for different time horizons each time you buy a stock is an important discipline. This is a skill you’re trying to evaluate and hone. To realize the maximum return on your terrific stock picking ability, you need to be good at picking the target sell price.

Mistake: Cutting Your Losses or Double Down
When the reason you bought a stock is clearly not going to happen or is not true anymore, you should admit the mistake and close out the position. If the price drops, this is the unhappy scenario. A lot of investors find it difficult to sell because they don’t want to recognize the loss. I think it is better to admit the mistake, take the tax loss, and let the government pay for part of it. Even if the price rises, I still think it is worth closing the position because you are in uncharted waters. Your judgment on this particular stock probably isn’t that good.

Alternatively, if the stock you buy crashes but you still believe the reason you bought the stock is valid, what should you do? Your ability to time when to buy is probably not good. You’ll need to evaluate carefully whether you should admit a mistake and close out the position OR stay in and maybe double down. This decision is now more about sizing.

A Better Idea
Always try to maintain around 20 stocks in your Investment Portfolio. Just because you picked 20 stocks to hold for 2 years doesn’t mean these are the 20 that should always be in your portfolio. Keep looking. They should always be your best ideas. If you come up with a better idea, you’ll have to decide which one to sell so that you maximize the quality of your portfolio.

Evaluating
Marketocracy has a unique “Trade Timing” analysis tool that helps you evaluate your skill at timing when to buy and sell. The “Trade Timing” report shows the average performance of all the stocks in your portfolio 30, 60, and 90 days after you've bought or sold shares. You can view the report as a portfolio average or drill down to see your timing performance for each individual position.

Here’s the magic. If your returns after you buy are higher than the returns after you sell, then your trading is adding value to your returns. You’re a good trader. If not, then your trading is hurting your returns. You should analyze your approach to understand why and improve your trading. Otherwise, you’ll need to put enough effort into picking stocks with good enough returns to overcome your trading weakness.

Size Matters: How Much to Buy and Sell
In hind sight, we would have liked to have bought more shares of our best performing stocks and less of our losers. If we had weighted our positions this way, the overall performance of our portfolio would have been much better.

To begin sizing your investments, you should think overall portfolio vs. shares or dollar amount in individual stocks. This isn’t natural for most people – but it is an important perspective adjustment. Marketocracy’s virtual stock trading system can help.

Starting Out
Before we jump to sizing, let’s begin with equally weighted positions. Your Marketocracy Investment Portfolio has $1 Million of virtual cash. Allocate 4% for each of the 20 positions. That totals 80% and leaves 10% to hold in Cash initially and 10% to allocate for new ideas and weighting.

Marketocracy’s Buy Wizard allows you to enter in multiple stock ticker symbols at one time and to buy based on percentage weighting in the portfolio as well as by number of shares or dollar amount. To buy using weighting, enter the percentage of the portfolio into, “New Position Size” (see below for example).

If your opinions haven’t changed and you don’t have a compelling reason to be more heavily weighted in one position over another, you should consider rebalancing your portfolio and selling shares in the top performers and buying shares in the bottom performers.

Don’t overweight your positions until you have the confidence make it a deliberate decision – not an accident.

When You’re Confident: Overweight
You should begin weighting your positions differently as you increase in confidence. Confidence is a function of your assessment of probability of success of a stock and your skill in making this kind of buy and sell decision.

As you buy each stock in your Marketocracy Investment Portfolio, enter your degree of confidence in the “Label” column (see “Stratification” report below). Initially you’re guessing but as you establish a track record of making decisions you can use our tools to evaluate those decisions. Our “Stratification” report (see below) clearly shows the performance of all the positions in your portfolio from top to bottom. See if your degree of confidence matches the performance of the individual positions. Now your confidence will be based on data that validates the effectiveness of your judgment in different scenarios.

Next: Focus on Your Investing Strengths
Now you have a stock portfolio using virtual money so you can make lots of investment decisions. This is an iterative process and the feedback we provide you through our tools will help you refine and improve your investment skills.