Investing Club: How to build a position in a stock you believe in during a turbulent market

Published Fri, Mar 18 20224:07 PM EDTUpdated Thu, Mar 24 20229:45 AM EDT

The major stock benchmarks rebounded this week as hopes for an end to the Russia-Ukraine conflict increased and we got our first Federal Reserve interest rate hike behind us. While commentary during the Fed's March policy meeting was hawkish, the market took it in stride. The hawkish commentary helped in two ways: First, it comforted investors by making clear that the Fed will do whatever is necessary to prevent inflation from running away on us. Second, it means that we can start to factor in the now-hawkish commentary and should data come out that's weaker than expected, the Fed can always walk back the commentary as needed. This is a favorable change for a market on edge about runaway inflation. Keep in mind that should we get to the point of needing six more hikes this year as signaled by central bankers, the assumption is that it would be due to a strong economy. While higher rates may mean contracted stock multiples, in the long run, a strong economy with higher rates is much more favorable to a weak economy with lower ones. While the economy and the stock market are not the same, the companies that the stocks represent very much operate in and rely on the real economy. Building positions during maddening volatility Given the incredible level of market volatility, we want to take a moment to discuss how we look at putting money to work, in general, but especially in a market like this. As members know, we always like to put a small amount of money on to start after we determined we want to be in a particular stock for the long-term. We know that nobody can perfectly time bottoms with any consistency and we address this by leaving ourselves plenty of room to build our position at better prices, which can lower our overall cost basis, should shares move against us after our initiation. That said, in a volatile market such as this, it's crucial that we don't simply instinctively add to positions on down days. While we do like to add on weakness, we have to acknowledge that whiplash action often results in the same levels on various down days due to relief rallies in between. As a result, it's not enough to just see shares down and add — instead, a study of the current position is in order. For the trust, while we certainly look to down markets for opportunities, we understand our cash is finite and we want each purchase to have the greatest impact. As a result, we are constantly pouring over not only our average cost basis in attempt to locate opportunities to lower that basis but also looking through the various purchases made for a given position over time to see which stocks may have hit lower levels that we have yet to deploy capital. Of course, you won't always get a lower level — and when a stock appears to be bottoming, it may be worth stepping in a few times at similar, even slightly higher, levels should the purchases help your cost basis. But once a few purchases around the same level are made, you don't want to keep adding at that level as it not only leaves you with less cash but also results in the position growing too large to meaningfully add to in the future should more attractive levels present themselves. Consider our position in Danaher (DHR), as an example, which we initiated at the beginning of 2022. Here's a look at our purchase history: As members can see, we put a small amount on to start , a roughly 0.75% weighting at the time of the purchase, and subsequently added at lower levels. Before going any further, as this was the first buy, we want to provide some context around the action. The day we initiated the position, Danaher was down 4% on no news. We misjudged how that day was the start of what turned out to be a bigger decline, but this purchase followed our general rule of thumb of buying stocks of high-quality companies when they drop around 5% on nothing. We added to Danaher on Jan. 4 and Jan. 5 , as the purchases did help our overall cost basis, however, after a couple of buys around the $310 level we stepped away and waited for a better opportunity. We then got it a week later and made two more buys on Jan. 10 and Jan. 11 . While the purchase on Jan. 11 was slightly higher than the day before, both buys again aided our basis – note that this second cluster of buys also provided us with 100 shares at an average of around $301. We could have done the full 100 on Jan. 10 at $296.50 — hindsight of course being 20/20 — but in a volatile market, it's often better to spread the buys out, and average out a cluster of buys. We then stepped away again — understanding that we had done enough to help the basis but that in this market, we could not keep adding at similar levels. The thing to be mindful of here is that it's not just about strictly buying at lower levels 100% of the time. Building a position is something of an art form and the combination of your cost basis and recent buying activity are what should dictate your subsequent purchase activity. Additionally, we naturally want to be a bit more aggressive when first building a position so as to not have an immaterial amount should shares move in our favor and leave us reaping little reward. Then again, a week later, a new low from the time of our initiation was realized and we once again added some shares on Jan. 18 . We then stepped away, awaiting better levels even though additional buys may have helped basis — note at this time the position was larger and we had enough invested based on percentage weighting to be meaningful should shares turn around but also that there was a decreasing amount of room to keep adding so each buy had to be more meaningful. We waited nearly a month but our patience was rewarded as we were once again provided a new lower level at which to add in the middle of February , so we did and then again stepped away. Finally as shares once again appeared to be leveling off, we did one final cluster of buys on March 8 and March 10 in the low $260s. To perhaps better illustrate this, let's look at a year-to-date chart of Danaher. While we remind members that it's company fundamentals that dictate whether we take a position, not some technical setup. We've circled five key moments in the trades explained earlier. We were building the initial position We were adding at levels that help basis as the stock appears to be finding support New lows since initiating the position were realized and we stepped in . Unwilling to catch what not seemed to be a falling knife as market volatility increased, we remained patient, didn't chase the sharp pullback and then added as that prior low from late January was revisited We stepped in once more as shares again caught support in the $260 to $270 per share area, reaching new lows for us to buy and meaningful aided our overall cost basis. Now let's consider what this action did for us: First, the slow start allowed us plenty of room to keep adding; second, the focus on both the prices we've already paid by studying our buy lots in addition to our cost basis, helped dictate where and how aggressively we should be adding shares; finally, this slow methodical discipline to add in such a manner has left us with a roughly 3.8% position and $298.16 overall cost basis. Meaning we still have room to add should we see further weakness and that we effectively dropped our cost basis by about 5.5% versus that initial buy level. We believe Danaher's stock will go higher over time, allowing us to perhaps strategically book profits down the road. We have not made any DHR sales yet. (Jim Cramer's Charitable Trust is long DHR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Traders work, as Federal Reserve Chair Jerome Powell is seen on a screen delivering remarks, at the New York Stock Exchange (NYSE) in New York City, March 16, 2022.

Brendan McDermid | Reuters

More In CNBC Investing Club Newsletter

New analyst reports support our view of Constellation as a great defensive play

Kevin Stankiewicz

Wall Street notes on Apple, Qualcomm highlight the long-term opportunities in those stocks

Zev Fima

Tuesday's market bounce allows us to raise some cash to buy in the next downturn

Jeff Marks