The experience with DCIX (now ~9% of the portfolio at cost) has also made me consider a new rule. In up markets, I need to scale up positions faster, but in down markets, I should scale up slower. In short, adjust for the environment. In down markets, you will always be surprised at how cheap things may get.
I think the experience with DCIX also reinforces the importance of holding lots of cash in periods of mediocre to lofty valuations. Even though this was my largest position and it declined 30% in my face, I'm only down ~3.3% YTD (vs. -11% for the S&P and -17% for the Russell 2000) because of the cash position.
Strategy
Despite the dramatic move in the markets, the opportunities I've seen are still by and large mediocre. That said I expect a near-term bounce as rarely do securities go straight from overvalued to cheap in just a few weeks. Like many hedge fund managers, I would take any relief rally as an opportunity to unload any positions I'm not happy with, and to increase my short positions.
Remember the environment. Any new positions should start off as 3-4% of the portfolio and then scale up to 10% as it gets even cheaper.
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