A portfolio of 8 stock picks from the edge

I made brief mention of how the 8 stocks were purchased on the Performance page, but wanted to provide a full post on the topic.

In general, “the bottom” is not an event, but a process. This is true of stock markets and should also hold true for individual stocks. When I decided to begin the 8 Stock Portfolio on August 1, 2008, it was not because I thought the stock market or any of the individual stocks had “bottomed.” I started the portfolio because things seemed so abysmally bad that by general consensus a bottom was nowhere in sight.

I was mentally prepared for further declines in each of the stocks, so I chose an investment plan to suit this belief. I set up a Sharebuilder account with a plan to purchase equal dollar amounts of each of the 8 stocks periodically over a set time frame. That way, my cost basis in each stock would be averaged down (or up) with each subsequent investment.

By making the process automatic and somewhat arbitrary, I was freeing myself from the necessity of picking a specific buying point or “bottom.” I was also making sure that I couldn’t talk myself out any of the purchases. Each of these stocks have recently had fast moving prices and would likely continue to fluctuate widely. Depending on your disposition, it can be very difficult to continue purchasing a stock that is either falling or rising in price. If a stock is constantly falling, you worry that it will keep on falling (maybe all the way to zero!). If a stock is constantly rising, you worry that you’ve already missed the boat (maybe it’s a bubble!).

I used Sharebuilder to essentially put the process of purchasing the stocks on auto pilot. I purchased equal dollar amounts of each of the 8 stocks on three sucessive Tuesdays over a three week period. The investment dates were 8/5/2008, 8/12/2008, and 8/19/2008.

In some cases, I ended up averaging down on a stock. Chicos was purchased for 5.51, 5.15, and 4.54.

In other cases, I averaged up. VMWare was purchased for 33.50, 35.81, and 40.69.

At the end of the day, I am happy that I chose to invest in this way. It is downright difficult to buy stocks when things look bleak. By using the plan described, I made the entire idea more palatable and less emotional.