Trading Strategy: Sell a loser to buy a bigger looser

I am not usually writing about stock trading, but with all the ups and downs we lived so far in 2007, I thought I would add my point of view on this topic. I have been trading since 2004 and made a reasonable amount of profit. While I am not trading with a large sum of money, I should end up my third of experience with a positive overall positive return.

However, my recent year has not been my best one as I am negative 6% as of this morning. The main reason being this is that I had to sell all my stocks back in October 2006 in order to purchase my property. Since then, I only put back money in the market last April, at the market’s peak. There were not much room for profit and the market dropped since then.

I recently wrote in my Financial Ramblings III that I made some change in my portfolio. In fact, after the markets’ drop, I looked at some stocks I was keeping an eye on. I noticed that two stocks dropped more than the average.

My first pick was Harvest Energy Trust (HTE.UN). It is an oil and natural gas income trust offering a very decent yield (about 17% at the price I bought it). Harvest dropped from $34,40 on July 10^th to $26,67 on August 20th. I bought it during that day at $26,89. This represents a slide of almost 22% in a span of a month and a half. The company just released its Q2 results with an increase in most categories. What does interest me the most is the distribution ratio that went down to 63%. They are gradually preparing the company for the “after tax free” period.

My second pick was pure speculation. I bought a mining stock (Chariot Resources; CHD). This company is implicated in a copper mine in Peru and its stocks dropped significantly as well. On July 20^th, the stock was sitting at $1,30. As of August 20^th, it has closed at $0,90. I bought it at $0,88 on that day. Then again, the stock went down by 32% in a month. It is true that penny stocks are more volatile then the rest of the market but still, I decided to take the chance. There is a high volume of shares traded per day and the industry of copper is doing well.

Regardless if I was thinking these were good deals or not, I did not have any liquidity to inject in the market. Then, I looked at my current portfolio and came up with the following trading technique: One of my stocks in my portfolio was only down by 5% from the time I bought it (Westjet: wja). I then decided to sell my loser (Westjet) and buy two bigger looser (Harvest and Chariot).

I estimated that the chance of both stocks going up to compensate the loss I incurred selling Westjet is pretty good. In fact, just with Harvest’s distribution, I should cover for my 3 transaction fees (1 sell and 2 buys) along with what I lost by selling Westjet sooner than expected. I’ll keep you posted on the result of my decision at the end of this year. Hopefully, I’ll be in a better position!

Have you ever used that method or other trading technique after a market correction?

 

 

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