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Exit strategies
Barry Ritholtz
On Exit Strategies
By Barry Ritholtz
RealMoney.com Contributor
2/15/2005 1:21 PM EST
URL: http://www.thestreet.com/p/rmoney/barryritholtz/10208989.html
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Market Commentary |
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In recent years, Apple shares have been a good illustration of the mistakes investors make.Many people either don't hold a stock long enough or hold on for too long.What selling signals do you use?
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I wanted to take a moment to talk about exit strategies. There's a lot more to this than can be covered here, so I plan on addressing this in a subsequent column. Let's look at Apple
(AAPL:Nasdaq)
circa 1999-2005. It demonstrates two common mistakes investors make -- they don't hold on long enough, or they hold on to a stock too long. If you bought Apple when co-founder Steve Jobs returned in the late 1990s, the stock rode the newly introduced iMac from $13 all the way to $150, adjusted for splits. If the phone call questions I got on Apple were representative of many 1990s buyers, too many investors rode it right back down to the teens. Fast forward a few years: In 2003, Apple is trading in the midteens -- a couple of bucks more than cash on hand. I spoke about the stock to many investors (institutional and otherwise). Again and again, I saw people who owned this in the teens sell it in the $20s or at $30. Why? "Because it's a winner in a tough market, and we need to lock down some profits." This was the answer again and again. That's essentially two mistakes in one. First, on a relative strength basis, you should hold on to strong stocks in a weak market. Second, selling something merely because it went up is no strategy; it's a guess. I certainly understand when fund managers have a position that balloons and becomes too large a percentage of their holdings, so they have to do a little trimming. But merely saying "I'm selling this 'cause it's gone up" is no strategy at all. Even worse is "I'm shorting this because it's been so strong," as seen in the homebuilders. Ouch. I'd be curious what rules other fundies/technicians on RealMoney use for sells. I'll start with two basic ones: One, if a stock breaks its uptrend, I'll sell. Two, on a runner like Apple, if it gives back 20%-25% of its profits, it's a sell. If you own Apple at $15 and now it's $85, you have 70 points in gains. A selloff of 15 points and I'm probably gone. Read more about exit strategies in Tuesday's Columnist Conversation.
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Last update: 16-02-2005; 14:38:52.
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