At the current time the market is overbought at a level which historically results in a pullback in the market closer to the 50 day moving average. As a result of this I have been setting our stop loss points very conservatively in order to make you that when a correction or pullback comes we will still lock in healthy profits.

Solar Portfolio Continues Outperformance by Close to 10X

Peter Lynch for | InvestorIdeas.com

04/01/13, 10:25 AM | Solar Power | Analysis and Trends

Our 2013 Solar Portfolio with 2 positions currently remaining has an unrealized gain of 82.04% as of the close Friday (3-22-13) vs. the general market averages being up an average of 8.4%.

 

Notes:

1.      The original portfolio consisted of 5 stocks.  Three of these stocks First Solar (FSLR), JA Solar (JASO) and Jinko Solar (JKS) were sold as a result of hitting their respective stop loss points.

2.       The portfolio has a realized gain on the three sold positions of 32.28%.

3.      This portfolio is an equally weighted portfolio – which means that there is an equal amount of money put into each position. In this theoretical example we invested $10,000 into each company.

The portfolio is generating incredible returns, especially considering that we are only 12 weeks into 2013. However, even though this is very positive, it is also very unusual. Another important factor to consider is the risk level of the general markets - the general markets are currently going through (at least) a correction from a very overextended and are in a greater risk area (overbought condition) and the likelihood of a further correction is still possible in the short term. However, most of my indicators are still positive for the intermediate term.

As a result, of being in this higher risk environment we have to think defensively and make sure to protect some of these incredible profits.

#1 Rule of Investing - Minimize your Losses and Maximize your Profits

The easiest way to do this is to set reasonable “STOP LOSS POINTS” – these are selling points that an investor sets to automatically take them out of a position to “minimize” any loss.

We will watch our stocks and when a stock drops to a STOP point we will sell, if a position does not hit stop point – we will keep moving up the stop point and thereby maximize our gains in that position by letting our “profits” run.

Three of our stocks – FSLR, JASO and JKS hit their respective stop loss points and all three positions have been sold for a realized profit of 32.28%. Setting reasonable stop loss points does not always work out optimally – stocks can drop past your stop point and then turn around and continue to move up.

But in the long run it will always turn out better if you focus on cutting losses and NOT letting them get larger and larger – the purpose of setting (and acting upon) stop loss points  is to cut losses but it is also to minimize your (the investor) emotional attachment to a stock.

New Updates Stop Loss Points

For our current portfolio I am setting the following stop loss points to automatically sell 50% of existing position that hits its stop point.

SPWR = $10.50, WFR = $4.25

IF these stop points are hit then the final portions of the positions would be sold at the following stop loss points:

SPWR = $8.50, WFR = $3.75

Note:  there are many methods of setting “STOP POINTS” some can be as simple as a percentage loss you feel comfortable with, say 10% - but this is a discussion too complicated for this format. These stop points I set based upon a method of technical analysis I used to pick the stocks.

I am being very conservative (read that as protective) because all of the stock in the solar industry are currently in long term downtrends and have approximately 50% higher volatility than the average stock – they are therefore classified as high risk stocks and an investor needs to be more cautious and protective of profits when dealing with stocks like these.

Market Psychology

The HARDEST THING for investors to do is know when to sell. That is why you have to set specific, non-emotional prices to exit if things do not go right. You cannot allow your emotions to get involved and take over your thinking.

Remember: markets fool the majority of investors by "Climbing a Wall of Worry" which is exactly what it is doing now. Once losses start and keep getting worse then  investors generally get on the "Slopes of Hope" and hope that their stock comes back - trust me, the "I hope my stock comes back" technique will NOT work.

Trust in your system and follow it regardless of what you think "should happen". Once you try to impose your will on your portfolio you will stop paying attention to what is most important – and what is most important to understand is “what is actually happening” NOT what you think should be happening.

If you looked at the portfolios of the most successful investors you would, in general, see the following pattern:

Approximately 80% of trades would be either small losses and/or small gains and approximately 20% would be very significant gains. This is exactly how we dramatically outperformed the markets in 2012, 2011 and 2010 – see summary performance below.

Solar Portfolio Track Record

2012: Solar Portfolio outperforms markets by 325%
Solar Portfolio   + 39.7%

Solar Industry Average   - 13.93%

Major Markets Average   + 12.19%

 

2011: Solar Portfolio outperforms markets by 1,416%

Solar Portfolio   + 17.56%

Solar Industry Average   - 70.3%

Major Markets Average   + 1.24%

 

2010: Solar Portfolio outperforms markets by 310%

Solar Portfolio   + 42.94%

Solar Industry Average   -14.2%

Major Markets Average   + 13.87%

Basically we accomplished this performance by simply following the #1 rule of investing – we cut our losses when things did not work out and we let our profitable stocks run and maximized our gains.

General Market Comments

At the current time the market is overbought at a level which historically results in a pullback in the market closer to the 50 day moving average. As a result of this I have been setting our stop loss points very conservatively in order to make you that when a correction or pullback comes we will still lock in healthy profits.

At this point the general market has been “resting” from its advance and solar stocks as a whole have been weaker lately. But keep in mind that all of the stocks in our portfolio have beta’s of about 1.5 (beta is a measure of a stocks volatility) the market has a beta of 1.0, so our stocks are 50% MORE volatile than the market. With this in mind, we have to be cautious with the market getting overbought and all our stocks having high betas.

Background Analysis Notes

Keep in mind that there are two basic types of equity (stock) analysis. Below are a brief description of each and its primary purpose:

Fundamental Analysis (“what to buy”) - this is the analysis of the fundamental financial condition of a company to identify which stocks you may want to buy when the timing is right. This form of analysis will give you NO indication of the best time to buy a stock or sell a stock.

Technical Analysis (“when to buy”) - this form of analysis will tell you "when" to buy a stock and when to sell the stock. It will do this by showing you (in chart format) the basic interaction of supply and demand and when the two change and shift which will indicate a time to buy or a time to sell.

 

 

The content & opinions in this article are the author’s and do not necessarily represent the views of AltEnergyMag

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