Intelledgence Buy Alert for THO

[Fiona]

Had a look at buying THO due to the recent alert for the stock.  When I checked it out, there seemed to be a lot of days where no trades took place, and the average liquidity was only $27,721.  The recommended position size for my Intelledgence portfolio was $38,432.  If I took a 20% position, it would be a position size of $5544, about 14% of the recommended position size.

I haven't found any guidelines in the Intelledgence manual about whether it's worth doing a position of less than half the recommended one, for example, or of whether to take trades in stocks that have more than 3 days with no volume except for trading halts.  SPA3 does have recommendations about these things. 

Are there any standard approaches to this kind of situation in the Intelledgence strategy?

My personal rule which I typically apply to all stocks anyway, is that I never buy more than 10% of the average daily volume (I'm conservative on that one), and I just don't 'feel comfortable' buying a stock with so many zero volume trading days.  (Unless I've misread my charting software, which is always possible, especially when I'm sick like this weekend.)  I liked the SPA3 recommendation not to trade if it had more than 3 zero volume days etc - if I recall that correctly.

In the past, the best profits I've ever made, probably never to be repeated, were ironically on a stock which at the time I bought in had regular zero volume days, and obviously low liquidity.  I broke all the rules, but knew the company very well.  Other stocks were less extreme but still profitable with low volume etc at the times I bought in.  So while my feelings are more conservative these days, I know its possible to profit if the company turns out to be a good one bought at the right time.

If there is a coaching note on this, I'd be happy just to be referred to it.  Thanks.

[Gary Stone]

Fiona,

There isn't a Coaching Note on this subject for Intelledgence.

Intelledgence calculates and displays the Liquidity when an entry signal occurs to allow the investor to decide how much of the Intelledgence recommended position size should be invested for their own portfolio.

We decided not to filter Intelledgence entry signals based on Liquidity like we do with SPA3 for the following reasons:

• Intelledgence is run centrally on our servers, not locally on the users computer (like SPA3) so setting user selected liquidy filters is a very complex issue to set up.
• Intelledgence is a Long-term System with an avg hold period of 19.2 months (SPA3 has an avg hold period of 8 weeks). Positions can be entered / exited over a number of days. Whilst this can have a negative effect in fast falliing markets (all approaches will in such conditions) most of the time it is OK.
• A Long-term system such as Intelledgence can be used by investors with small capital bases of as little as $10K so small positions can be taken in the lower liquidity stocks.
• The experience that you have had with illiquid stocks is not uncommon for long-term positions and can work in your favour provided you are aware of the risk that you are taking of not being able to close the position in an adverse market. We didn't want to filter these out. An excellent example is SST which is up 321% since the Intelledgence entry in 2005 with no pull back during the entire period of the GFC!

In summary, Intelledgence is not as prescpitive as SPA3 when it comes to position sizing for the more illiquid stocks but the investor must still decide what approach they will take and commit it to their Trading Plan.

I trust that this makes sense you you.
Regards
Gary

[Fiona]

Thanks for that reply Gary - that's very helpful to me in deciding my approach, which I'll now write up.  Since I've had such positive long term experience with a small number of illiquid stocks, I don't really want to exclude that possibility from my portfolio.  One example was a return of over 1000%; another was 400% - not expecting to repeat these necessarily, but its good to hear about the example of SST.  At the same time past experience has made me aware of the potential difficulties when both buying and selling illiquid stocks.

So I'll put together some rules or guidelines re gradual entry/exit - that makes sense when differentiating between SPA3 and Intelledgence, and have decided that in the case of illiquid stocks, a much smaller position size is OK if necessary.  Better perhaps than no exposure in the long term, particularly when occasionally these can be very rewarding.