Using the Value Stock Buy List Program Productively - Dealing with S & P Downgrades AND Averaging Down

Dealing with S & P Downgrades:

• That's really a function of how low it goes. I'll get out ASAP if it goes below "B+", taking even a minor profit or loss as soon as I'm aware of the change. Then, if it's a larger loss, I'll consider it a candidate for "ATH" loss taking, but some judgment is certainly required. For example, when IBM went to "B" status years ago and Dupont did the same more recently, I held out for those small profits. With a less well known or widely held issue, say good bye as quickly as possible.
• Downgrades between the "A" categories are not as significant to me, dependent again on my familiarity and experience with the company as a trading vehicle. I don't give up too easily on issues that I've had good experience with, and even though the overall trading objective can be somewhere between four and seven months, you will always have situations that you wind up holding on to for much longer periods. There won't be many, and it's perfectly acceptable to take a smaller profit or even a small loss on a seriously long holding.
• A downgrade to B+ should raise a cautionary flag, but it's nothing to be too afraid of, unless your overall portfolio seems to lean in the B+ direction. I've made a lot of money over the years at this end of the Quality spectrum and such a downgrade may just turn out to be an excellent buying opportunity. Keep in mind that we are looking at the bigger and stronger companies in the first place and that many of these become more attractive as takeover candidates at lower prices.

• Within the "Brainwashing" book methodology, there are management controls (checks and balances) that warn of problems at the companies we invest in. Specifically, a cut in or elimination of the dividend, and an S & P downgrade of the stock below investment grade. Rarely is there a situation where serious trouble won't come to our attention in time through one of these mechanisms.
• I can think of only three glaring instances over the years where an Investment Grade Rating held up to the very end: Ames, Enron, and Friedman's. But, and key to the overall methodology, major individual portfolio disasters were avoided because of individual security % of portfolio diversification rules that must never be violated and which must always [absolutely always] be calculated using The Working Capital Model.
• Also, in each instance, profits had been made on the security more than once prior to the disaster.

The "Buy More" Decision (Averaging Down):

• Generally, I won't buy more of an existing holding if I have an adequate supply of new opportunities to choose from. Stocks that go down this much on news or because they are in a weak sector (the drug companies, for example) don't seem to bounce back as quickly as the newbies.
• I also won't consider buying more of a stock that has been downgraded to "B" or lower. These become candidates for the "ATH" decision.

Assuming that the "fundamentals" haven't deteriorated, and that the current buy list isn't wonderful, is the "30% down from cost basis" a hard number or a guideline?

• I stick to the 30% faithfully, although I do consider it a guideline rather than a strict rule. As your experience grows you'll be able to judge better, but there is nothing wrong with doing nothing. Buying should always be done slowly.