Expert: Paul Henneman - 1/5/2009

Question
I will apologize now for this lengthy question, more like questions.  First, I'll let you know that I'm an advocate for value investing and I like Benjamin Graham's and Warren Buffet's philosophies on investing.  I'm young and fairly new to investing but it doesn't seem like rocket science except for the craziness on wall street.  I am limited to how much money I have to invest every month.  I have devised a plan where I rebalance between cash and stocks evey 3 months, the more the DOW goes down the higher my percentage of money goes to stocks and the higher the DOW goes, the lower my percentage of money goes to stocks.  For example, right now i'm 60% stocks and 40% cash.  If the DOW gets between 7,000 and 8,000 again I'll be 65% stocks and 35% cash and on the other hand whenever the DOW comes between 10,000 and 11,000 again I'll be 55% stocks and 45% cash, I adjust at 5% increments of every 1,000 points the market moves.....this is largely going to be based on companies multiples though, but I'll assume if the market approaches its highs again P/E ratios will increase to unsustainable levels, is this a sound strategy?  My last question, I love bargain hunting and picking individual stocks.  many of which would fit Grahams category as cigar butts which increase in price after I purchase them, sometimes as much as 20% in a week, then they usually fall again.  I have trouble selling because I realize through sharebuilder, which is the trading platform I use that it costs $4 to purchase shares and $10 to sell. Therefore the transaction fee's will cause me to just about break even.  I guess its good that I thought about this sooner than later but, is there a rule of thumb for how much the transaction fee's should cost compared to the investment?  I have about $300 a month to invest with, if there are 3 stocks I want, I'll buy $100 worth of each, but then the transaction fee's are 4%, that seems rather high.  Is 2% or 1% ideal?  When is an ideal time to sell a winning stock because it can only go up so much before it comes back down?   I know the logical thing to do is to put the $300 a month into an index, but I find so many great bargains in these times.  Any insight you can give me would be very helpful, thank you.

Answer
Alex,
  Thank you for your question!
Clearly you have thought this through well, and I don't really have much to add to your above analysis. Your problem, as you note, will be trading costs. Typically it is not advisable to trade frequently if you don't have enough in the account, because the trading costs will eat up the profits.  There is no simple answer to this, you just have to estimate what you expect your trading costs to be going forward each month. They should not amount to more than a few percent of your total funds each year at the maximum.
  Sharebuilder is a good service, www.FOLIOfn.com is another good one with low transaction costs.  But, these services really are not meant for frequent trading, but for long term buy and hold type investing.  While your ideas are very sound regarding the weighting of your holdings depending upon the overall state of the market, you may have to settle for buying when you feel the market is low, and simply holding on for a time until your investments grow from returns and additional deposits to a large enough amount to support greater trading costs.
   One more thing to add: the markets typically are not as volatile as they have been for the past year. This may very well continue through much of 2009, but when the economy eventually begins to recover, whenever that may be, it is likely that this period of extreme volatility will pass.

I hope that this helps! Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com