I'm sitting here watching Moderna's stock price hit $183 this morning, up $2 and change.
The stock's all-time high is $189, so there's a good chance we could see this vaccine maker's shares hit a new record perhaps today, or next week.
It depends on whether short-term folks are buyers or sellers when we get past the Memorial Day holiday weekend.
As I've noted in prior posts, I own this stock already at much lower prices. So I'm not a buyer today.
But this situation reminds me of a challenge I struggled with for a long time as an investor and speculator, trying to learn the ropes (and not lose one's shirt doing so)...
I'd see a stock I did not own, clearly making a run towards new all-time highs, like Moderna is today.
I. Could. Not. Pull. The. Trigger!
I couldn't buy the stock.
There's something about a stock just about to hit all-time highs that makes it hard for new investors to buy.
The fear is that the stock will reverse and fall like a rock, the moment after we make our purchase.
Or perhaps the stock's 'magic mojo' - its momentum - slowly leaks out right after purchase, like a cheap inflatable beach toy from Dollar Tree.
Eventually I overcame my hang up.
- By using an investing/speculating system.
To me, a "system" is a set of beliefs to guide your stock purchases.
It could be a computer algorithm. It could be astrology. The main idea is to have something to guide your process (beyond watching CNBC or a twitter feed on "meme stocks").
In my case, I use what I call a "fusion" system that combines both fundamental analysis with technical analysis.
For instance, as I've noted in prior posts, I have some idea of what I believe Moderna's stock will be worth in coming months, based on its earnings and profit growth.
My analysis could be wrong or right. But based on my math, the stock looks undervalued. Therefore sooner or later it has to move above those old all-time highs.
On the technical analysis side, I've seen enough stock charts to know that when a stock keeps rising up to a certain price level, falling back, rising up to that level again, etc - at some point, the odds say it's going to break through that 'resistance' level and move higher.
There's no law that says a stock MUST break through the resistance level. I'm just noting to myself that the probabilities (in my opinion) make it likely.
2. Think of what you can tolerate losing BEFORE you make the purchase.
For me, I have a standing rule: I'll risk no more than 1% of my total portfolio value on a stock buy.
For example, if I have a $100,000 portfolio, that's $1,000. If I had a $10,000 account, then we're talking $100.
That number - 1% of my total portfolio value - is my "Risk Per Trade" or RPT.
As I'll explain below though, "risk per trade" DOES NOT mean I'm buying $100 or $1,000 worth of stock.
Simply put, RPT is the amount I'm willing to lose if I buy a stock at x-price and it goes down instead of up.
I use "1%" because, the way I think of it...I can be wrong 10 times in a row on various stock purchases - and only lose 10% (in theory) of my portfolio's value.
That's what I think of as a recoverable loss.
If I started with $10,000 in a brand-new account - and wind up with $9,000 after a series of poorly considered stock purchases, bad luck, whatever - then it takes a $1,000 gain from my remaining $9,000 (or a gain of 11%) to back my portfolio back to breakeven levels again.
That's achievable. I can do that if I'm careful.
Losing more than that, say - 20% or 30% of my portfolio's value - means it becomes much, much harder to recover. Do the math. A 30% hit to my portoflio means I need a gain of 42% to back to breakeven levels.
3. Note my "decision point" - where I would consider selling the stock for a loss.
For instance, if I were buying Moderna for the first time, I'd look at the most recent low on the chart - roughly $143, the red line on the chart below - as my "decision point."
Or perhaps I could draw my red line at $120 (the March lows) or at $104 (the January lows).
But regardless, my logic would be that - for whatever reason - I was wrong about the stock, and my expectations of new all-time highs aren't going to be fulfilled if it falls to that previously-noted level.
4. Subtract the current price of the stock from my "decision point" price.
In Moderna's case, it would be:
$185 (current price) - $143 (decision point "selling level") = 42
5. Take the resulting number from Step 4, and divide it into my RPT (risk per trade).
In the example, my earlier "risk per trade" example was $100 (for a $10,000 portfolio).
So if I divide $100 by 42, it tells me I can buy 2 shares of Moderna.
Now, 2 shares - or roughly $366 at Moderna's current price - may not sound like much.
But the key point to remember here is that I'm keeping my risk proportional to the size of my account.
No matter if I'm trading $10,000, $100,000 or millions of dollars - by using my risk management system, I always have a good idea of what I might lose before I make a stock purchase.
You might ask, what if an investor wants to buy more than 2 shares?
Fine. We all have varying ideas of what constitutes a tolerable amount of risk. But at least I now I have a concrete way of measuring my risk.
For instance, perhaps I want to commit 10% of my $10,000 portfolio to buying Moderna's stock?
With the stock at a current $185, divided into $1,000 (10% of my portfolio), the math tells me I can buy 5 shares - or $925 worth of Moderna stock.
If for some reason the stock goes down instead of up, my theoretical loss (provided I sell the stock at my "decision point" level of $143) would be a little over $200 (or 2% of my portfolio).
Hopefully you can see how useful this can be.
By using my system, I have a very good idea of my risk before I make a stock purchase. I could lose 1% - or $100 of my $10,000 account - and I know that losing $100 isn't going to sink me.
On the other hand, I now have the peace of mind to give my Moderna trade time to work. I can own it for days, weeks, months or years - and potentially reap the benefit.
And since I'm only committing small portions of my capital to any single individual stock idea, I can spread my money across a range of different stock ideas that might pay off the same or better.