I bought Sears Holdings (SHLD) on friday, and today it dropped 10% on lowered revenue guidance. This is the 2nd time SHLD has missed revenue estimates for the quarter.

Luckily, I only had about 2.5% of my portfolio in it so my losses were minimal. You never know which stocks will do well and which ones will flake on you. So you keep your position sizes small. It may prevent you from achieving great wealth, but it also prevents catastrophic losses.

Its also a good idea to bail on a stock if it drops 10% below your purchase price. I have a strong feeling that SHLD will rebound, but for now I’ve chicken out. “He who trades and runs away, lives to trade another day!”

The idea is to let your winners run and to keep your loses small. And never let your ego get in the way of your trading. Once your ego sets about trying to prove who’s right, you lose rationality and your performance will definitely suffer.

A couple of days ago, I wondered if the stock market was a little over-priced.

Today I received an email from one of the many free investing newsletters I subscribe to and the echoed a similar sentiment.

“The NASD, a brokerage regulator, recently sent out an ‘alert’ to investors outlining the risks associated with margin. Through the end of March, the latest data available, the amount of debt taken on by investors to buy stocks totaled $317.7 billion. And while that was a bit below the $321.2 billion record hit in February, it still surpasses the $300 billion in March 2000 at the top of the tech-stock bubble.

“‘If you’re borrowing money from your broker to buy stocks, you’re basically speculating,’ says Chris Johnson, investment strategist at Johnson Research Group.

“A sharp rise in margin debt means investors are eager to own stocks. And such spikes are often associated with market tops, as was the case in 1929 and 2000.

“Sure, investors have a chance to boost returns by using other people’s money – a technique called leverage – to buy more shares than they could on their own. But buying on margin is just another form of debt, another IOU, another buy-now-pay-later transaction.

“‘We’re not trying to set off alarm bells,’ says Elisse Walter, senior executive vice president at NASD. ‘But with margin debt (near record levels), we felt it was a good time to remind retail investors what margin is, how it operates and what the risks are.’”

Seems like the market is a bit overvalued. It may not necessarily correct but there’s no point taking on unnecessary risk. So I’ve decided to cut back on my margin holdings. I don’t usually have a lot of stock on margin but sometimes it just creeps up. I had about 12% of my portfolio on margin which I’ve scaled back to 8%. I’m thinking I’ll lower that down to less than 5% if not 0 in the next few days.

It was 0 in January, but like I said, it has a habit of creeping up on you. Plus I recently sold some of my stocks with gains and pulled 10% cash out of my account to cover some rental vacancies and part of a car purchase for the wife. That also caused the margin-to-portfolio ratio to increase.

The Dow has currently been up 24 out of the past 27 sessions. From what I’ve heard, this is a record. Its NEVER done this before!!!!

And its not like the US economy is rock-solid. According to Chuck Butler of Everbank.com, the US unemployment rate should actually be at 12% instead of the 4.5% that the government actually discloses. Also, all the emerging markets have had a higher GDP growth last year than the US. This has also never happened before!

And the US Dollar is weakening against almost every other major currency there is. Not exactly a confidence builder!

There’s also a saying in the stock market, “Sell in May and go away” which refers to the historic fact of summer stock price slumps that happen more often than not. There’s also studies that show the major returns occur between October and April every year.

Given all this good news, is the stock market currently overpriced? A lot of my stocks have done ok and a few have done exceptionally well. (Anglo-America(AAUK), BHP Billington(BHP) and Yumana Gold(AUY) are up over 30% in the past 6 months). The Canadian Income Funds I own are mostly break-even but they pay out around 1% every month so I’m not really concerned, especially with the Canadian Loonie strengthening against the USD and hitting 90 cents now.

Even stocks in the retirement accounts like Petro-China(PTR) have finally shown some signs of life! After jumping from $109 to $140 and then dropping back down to $109 its back up at $129.

Most of these stocks that I’d like to hold for the long term. There are however, several stocks which are a bit more speculative. They’re roughly 10% of my portfolio and about 1-2% of my net worth. So even if they were to drop it wouldn’t negatively affect my lifestyle.

That being said, no one likes to lose money. Especially if it looks like everything is stacked against you.

I’ve heard of some people liquidating 50% of their positions and taking the summer off. Doesn’t sound like a bad idea, but there are tax consequences to this. Plus, if you don’t do anything and the market comes back in the fall, the commissions and taxes were unnecessary. Plus you might miss a big move.

What are you guys doing?