I wanted to take a moment to talk about exit strategies. There’s alot more to this than a brief blog post has room for, so I plan on addressing this in a subsequent column.
Lets look at Apple, circa 1999 and 2005. It demonstrates two common mistakes investors make — they don’t hold on long enough, or they hold onto a stock too long.
If you bought Apple when co-Founder Steve Jobs returned in the late 90s, the stock rode the newly introduced iMac from $13 all the way to $150 (split adj). If the phone call questions I got on AAPL were representative of many 90’s buyers, than too many investors rode it right back down to the teens.
Fast forward a few years: In 2003, Apple is trading in the mid-teens — a coupla bucks over cash on hand. I spoke about the stock to many investors (insitutional and otherwise). Again and again, I saw people who owned this in the teens sell it in the $20s or at $30.
Why? "Cause its a winner in a tough market, and we need to lock down some profits" was the answer, again and again.
That’s essentially 2 mistakes in one: 1st, on a relative strength basis, you should hold onto strong stocks in a week market. 2nd, selling something merely because it went up is no strategy — its a guess. I certainly understand when a fund manager has a position which balloons to too big a percentage of their holdings, so they must do a little trimming; But merely saying "I’m selling this cause its gone up" is no strategy at all. Even worse is "I’m shorting this because its been so strong" ala the home builders. Ouch . . .
I’d be curious what rules other fundies/technicians use for sells. I’ll start with two basic ones:
Rule 1) if a stock breaks its uptrend, I’ll sell.
Rule 2) on a runner like Apple, if it gives back 20-25% of its profits, it is a sell. If you own AAPL at $15, and now its $85, you have 70 points in gains. A sell off of 15 points, and I’m likely gone.
Any other exit strategies out there?