Many years ago, I received a frantic call from a gentleman that had "bet the farm" on a speculative stock that was mentioned on CNBC. He was losing his shirt on the position and wanted to know what to do with it. Even though I felt very bad for him because he had been paralyzed in an auto accident and bet his entire injury award, $360,000 on the stock, I refused to offer him any advice. But I wondered, "How could he be so stupid?"

This incident led to my classic essay, dated 05/24/96, "Where's the Beef?" More recently, 05/11/07, I wrote about a guy who lost $500,000 on the quiz show, "Are You Smarter than a Fifth Grader? Two weeks later, I wrote another essay called, "The Risk of Ruin." It was about position sizing, actually.

Position sizing is a very important part of portfolio management and, in fact, it is the first thing one should consider when putting money at risk. Before making any investment, whether it be for the purchase of a car, house or stock, one must ask, "How much can I afford, or am I willing, to lose on this investment?"

The answer to this question has several parts, the first being that of asset allocation, i.e., "What percent of my net worth can I risk in this particular asset class?" Once this has been translated into dollars, you know how much money you have to work with. Let's suppose the amount is $10,000. The next question becomes one of, "How should I invest it?"

It is generally believed that one should not risk any more than two percent of their stake in any single stock position. Even that seemingly small amount is too much for me. I believe that one should not risk any more than one percent of their stake in any single stock position. (See my 02/06/09 essay on Risk Management). What? One percent of $10,000 is only $100. How can I make any serious money investing only $100 at a time?

Hold on, silly boy. There's a big difference between what you invest and what you risk. For example, you may invest $1,000 of your $10,000 stake in any single stock position and still limit your risk to $100 by using a 10% Stop-Loss order. Or you can invest $500 in any single position and use a 20% Stop-Loss order. In fact, there are an infinite variety of investment and Stop-Loss combinations you can use to limit your risk to one percent of your stake. My essay, "How to Set the Right Stop-Loss Percent," dated 02/20/09, explains exactly how investment decisions and Stop-Loss percentages are tied together in Position Sizing.

In regard to managing the Model Portfolio, we start with a stake of $100,000 at the beginning of the year and normally elect to have 10 positions with a 5% or 10% intraday Stop-Loss, depending on how we feel. At the end of each day we calculate new Stop-Loss Prices from the higher of our purchase price or the highest closing price since purchase. Our goal is to get the Stop Price above the purchase price as soon as possible.

In the current campaign, which started on Monday, June 22nd, we used 50% of our available funds to establish 10 positions. Therefore, we are effectively risking only 5% of our stake even though we're using a 10% Stop. Moreover, we have not been replenishing vacated positions since the downturn has appeared to fizzle-out.

One of the errors many investors make is they think that making money in the stock market is only about picking the right stocks. It could be if you're right all the time. But nobody is right all the time. So the secret to success is that of making money in spite of your losers. In fact, many of the most successful money managers say that of even greater importance than stock selection, is Position Sizing and Portfolio Management.

Last Friday I said that the market had been "as flat as a pancake" and the Buy, Sell Ratio, BSR, a.k.a., the Canary, had given us fair warning that the magnificent rally from the March 9, 2009 low was losing steam. Sure enough, stock prices fell sharply on Monday, June 15th, and the Primary Wave, i.e., the week-over-week movement of the Price of the VectorVest Composite, went from Up to Dn.

It is highly unlikely that the Primary Wave will return to an Up mode today, given the market's wishy-washy performance. Therefore, it's time to prepare to go short in the Model Portfolio if the market moves sharply lower. It is also a good time to review and update the procedure we will use. Here are the basic steps:

1. BEST STRATEGIES. First of all, we will identify five Strategies that we believe are the best ones to use under current conditions. We give you five Strategies instead of one because we do not want to "move the market." We have also discovered that being open to using more Strategies increases your chances of picking a really big winner.

2. EXAMINE THE STRATEGIES. Before the market opens on Monday, use the UniSearch and Quick Test Tools to see how each Strategy has performed recently and what kind of stocks they have been finding. Are they right for you? If not, it's OK to cherry pick a list of stocks that are more to your liking.

3. WATCH THE FUTURES. The Futures give an indication of whether the stock market is likely to open higher or lower. Since we're planning to go short, on Monday, we want to see the Futures on the Dow, S&P 500 and NASDAQ go down. This information is available on TV as well as the internet. PLEASE NOTE: THE MARKET DOESN'T ALWAYS DO WHAT THE FUTURES INDICATE.

4. WATCH THE MARKET OPEN. The key to making a good entry is to make sure the market is going in the direction you want. All sorts of things happen as the market opens. It often reverses course in early trading, so it's best to wait 30 to 60 minutes to get a better idea of what it wants to do. We want to go long on a sharp up move and short on a sharp down move. By "sharp," I mean that the DJX, SPX and IXIC all must be up or down by one percent or more after 10:00 AM EST. They also must be trending in the right direction at the same time before you trade. BOTH OF THESE CONDITIONS MUST BE MET.

If you miss the Open, it's OK to make your trades as long as the appropriate conditions prevail.

5. TRACK STRATEGY PERFORMANCE. You should begin tracking the real time performance of the top 10 stocks from each Strategy from the time you see the market moving in the right direction. If you don't have VectorVest RealTime, you may use VectorVest Portfolio Tracker, but it is on a 15 minute delay. You may also track a portfolio's performance in real time on Yahoo!Finance, or similar facility.

6. PICK STOCKS FROM THE STRATEGY WITH THE BEST PERFORMING RATING. The performance rating is the percent winners times the percent gain. For example, a Strategy may yield seven winners and an eleven percent gain. Its performance rating would be 7.7. Another Strategy may have three winners and a 20 percent gain. Its performance rating would be 6.0. I'd pick the Strategy with the 7.7 rating. When going short, I will not sell any stocks that are going up in price.

7. BE PATIENT. If the desired conditions do not develop on Monday, just sit tight. Watch the Daily Color Guard Report on Monday evening and re-assess the situation. The whole idea is to make the right trades at the right time.

The procedure I have just described has evolved over a long period of time and I have written about it many times. Today I simply covered that aspect of entering positions. Next week, I'll cover the subject of Position Sizing; then Managing the Model Portfolio. That should complete this Update on Riding the Wave.

The VectorVest RealTime Derby will be ready to go at the opening bell on Monday, June 15, 2009. It will run 192 Strategies, 159 Long and 33 Short, as of the previous day's Close, create a mini-portfolio of the top 10 stocks from each Strategy; then track, rank and display each portfolio's performance in real-time from the opening bell to its close. The RealTime Derby is incredibly easy to use and takes trading to a whole new level.

A FREE Two-Week Trial is available now at www.vectorvest.com/derbytrial. But you must have VectorVest RealTime to use this Tool. You may subscribe to the RealTime Derby for only $99.00 per month or $1,095.00 per year. Elite members may subscribe for only $995.00 per year. It's Simply Amazing.

FAIR WARNING.
If you've been checking in on the Daily Color Guard Report, you should be well aware that the market has been as flat as a pancake for the last seven trading days. This pathetic performance is the clearest sign yet that the rally from the March 9th bottom is running out of steam. The "Canary" saw it begin to happen a lot earlier.

The Price of the VectorVest Composite closed at a rally high of $19.57 per share on Monday, May 8th. The Buy, Sell Ratio, BSR, a.k.a., the Canary, also closed at a rally high level of 6.21. After the market moved down the next three trading days, the BSR stood at 3.70. As the market recovered from its three day swoon, and even hit new highs, the BSR did not return to its former high of 6.21. This phenomenon of rising Price and falling BSR is not new to us, and I wrote about it in the Strategy section of the May 22nd Views. I said it defines the end of the "blast-off" phase of a rally and the beginning of the "glide" phase.

Since the glide phase of a rally reflects a period of diminishing price momentum, one should become less aggressive and more defensive in managing their portfolio when the Canary has given Fair Warning.

"Outlined against a blue gray October sky the Four Horseman rode again. In dramatic lore they are known as famine, pestilence, destruction and death. These are only aliases. Their real names are Stuhidreher, Miller, Crowley, and Layden. They formed the crest of the South Bend cyclone before which another fighting Army team was swept over the precipice."

With apologies to Grantland Rice, their tickers are AAPL, GOOG, RIMM and AMZN. They form a fearsome foursome that has gained gobs of ground since that cold gray day of November 20, 2008...up an average of $83.74 per share, 97.46%. Watch these amazing runners carefully. With an average price of $187.89 per share and AvgVol of 12.6 million shares per day, they're big, fast, and the darlings of the big boys.

GOOG didn't join the team until August 20, 2004 when it was only $108.31 a share. It grew up fast. But all of them did. AAPL was only $15.40 a share, RIMM $20.59 and AMZN was $39.51. Their average Price was $45.95 per share. They peaked at $287.97 on November 6, 2007, three trading days after we got the C/Dn signal on November 1, 2007. Yes, they got thrown for big losses by the Bear, down 63.83%, to close with an average loss of $183.82 by the time they hit bottom on that cold gray day of November 20, 2008.

Now they're gaining ground again and have recovered 84 bucks of that huge loss back. Can they get the next hundred? You bet they can. They're all running well and steadily going higher. As long as this rally continues, you may want to own some of The Four Horseman.

P.S. If you don't want to pay the high prices of these stocks, consider buying Call Options. Personally, I have Synthetic Long positions, wherein I bought at-the-money Calls and sold at-the-money Puts on these stocks. My net cost is only a few dollars per share. See my essays of 12/17/04 and 04/01/05.