How Much to invest Analysis

Discussion in 'Strategy Development' started by waterboy, Apr 2, 2006.

  1. waterboy


    ok, there's a penny stock [$3]
    that I believe has the potential of rising 5x in the next 1-2 years.

    My net worth is, say 100k, and I'm willing to risk 10%, or 10k, in this investment.

    I feel my risk in this stock is 50%, if all goes bad.

    So, am I correct, to invest $20,000, or 6,666 shares?
    Worst case, stock falls to $1.50, and I take a 10k loss.

    Have I made any major errors here?

  2. Its probably best to bet that it can go to zero before it can go to $20. limit it to 6.5% of your portfolio and forget about your "stop" because most stops are worthless in penny and OTB stocks.

    therefore buy $6.5 k of stock.
  3. A very important consideration would be how liquid the stock is and how many shares it trades every day. If you are taking 6,700 shares of a stock that trades 20k daily, then you might consider that it will go to $0.0001 per share before you get filled on your stop. It is not wise to use stops in illiquid stocks.

    Good luck.
  4. Getting into a position all at once and verbalizing being willing to lose 50% on it aren't good. Instead, initiate a 1,000 share position at $3 and then add another 1,000 shares at 4 and then 1,000 more at $5 and so on and so on in order to reduce your risk. Yes, it does reduce your profit potential somewhat but you'll sleep a lot better realizing that you're adding on to a winner and you're making the stock show you something instead of magnifying your losses if it goes lower with your original ~6,700 shares.
  5. waterboy


    I like the
    "Buy 1,000 shares at a time, as it rises".

    That seems to make sense, and may take the emotion out of it.

    The stock trades close to 10 mill shares daily, so liquidity is no problem.

  6. FCCT


    Averaging up would work if it went one straight up...

    I think you are better off trading the stock with a long bias. Average into your position, wait till it bases to average, buy on dips, partial out on rallies, play a range or upward channel.
    Always good to lock in some green.

    By the way, if it did go to 1.50 would you liquidate? probably not if you think theres 10 dollar plus upward potential.

    What stock is it?
  7. kut2k2


    Why do you believe this stock has 5x potential in the next 1-2 years? If your belief is based on fundamental analysis, I hope your analysis is correct, but FA says nothing about timing. If your belief is based on technical analysis, then you must have done some backtesting to validate your long-term prediction. If your backtesting is based on less than 30 trades, then your results are statistically suspect. You now can reevaluate your belief and decide if this is a path you want to go forward on.
  8. waterboy


    It's based simply on potential, if the "device" works [for insulin].
    At this point, all I can say is, it looks promising, or that it might work. gnbt is the stock.

    If it went to $1.50, I would start with "why" did it fall, then go from there. I would sell, and re-evaluate.

  9. position sizing is an extremely important part of trading, investing (two entirely different things) - a fundamental aspect of risk management

    but there is no RIGHT answer. there is only an answer that is right given your particular goals, and your particular views towards risk management, risk of ruin potential, time horizon, etc.

    for example, if you were 20 yrs old, and had amassed a stake to invest/trade (say 50k), and you had an option to plunk it down on something that had a 50% change to multiply yer money 1,000% and a 50% chance to reduce it to zero - would you take it?

    well, if i was 20 yrs old (consider future earnings potential , time horizon, etc.) i absolutely would take that risk.

    if i was 60 yrs old, and it was my entire stake? no.

    again, there is no one right answer. you have to determine all these variables for your particular situation then make the decision for yourself. this is (imo) the most important aspect of trading/investment.
  10. gkishot


    If you are willing to take 10k loss why won't you invest 10k instead of 20k off the bat & let it go to 0 without any stop losses.
    #10     Apr 2, 2006