Exit Strategy

November 9th, 2008 by Potato

Obama handily won the election in the States, and among many of the things he promised to do was to come up with an exit strategy for the war in Iraq.

That led me to think: what is the exit strategy for my stocks? I’m mostly a buy-and-hold-forever investor, and so far most of my selling has been due to forced sales by takeovers (golftown, Q9, IPC), or bankruptcy/going out of business (Surebeam, FXI). However, this year I made a number of trades on what was essentially an ad hoc basis. I think I should probably come up with a more thought-out exit strategy. First off, I’ll review the sales I’ve made over the last year:

Q9: I’ve traded this one like crazy this year. I bought in a number of years ago and just held on, until there was a spike in the stock price that was downright euphoric. After the stock dropped about 20% from the peak, I sold half my holdings, still at a 50% gain from where I originally bought them. This was in January, when things were looking bleak, too. I picked that half a holding back a few months later a fair bit after it bottomed out and was halfway up again (I waited for the quarterly results to come in), and then sold again after another 10% runup in the price through the summer. Finally, the takeover went through in October, taking away the half of my position that I had held onto from the beginning.

Russel metals: I bought into this one thinking it was undervalued at $24. It fell a bit after I bought it, but quickly rebounded to hit my target price of $30, where I sold out.

Opti: This was another case of selling out after a rapid rise. It had jumped about 12% in less than a week, and I sold out, thinking that was as good as it was going to get. For the next few months, it went substantially above my sell price… but has come crashing down to earth so hard this last month that it feels really good to not be in it.

BMO: In mid-September I was getting very illiquid, and also wanted to jump on what I thought was a bargain on HR.UN (hint: it wasn’t, but I think now HR.UN is a bargain…). I figured that the banks were not going anywhere any time soon, so I sold my BMO at a loss (~8%) more to sell something than to sell BMO in particular. I got lucky there, as it’s down another 12% last month.

TD: I sold my TD back in January, basically because I was spooked. I bought it back in the summer for slightly less than I sold it at, which is good, I suppose, though there were many better times to get back in (including right now).

So looking at all these sales, I basically sold whenever a stock ran up in price more quickly than I was expecting it to (and once due to emotions/unease). I spend a lot of time here talking about and analyzing individual stocks, and that’s because I believe that when markets get insane like this there are real opportunities to be found. However, I still believe that there’s a lot of value in the indexing approach, and indeed I have been slowly buying up index funds with my monthly savings this whole time too… but that’s not as much fun to blog about. So I tend to only buy a stock when I think it offers something beyond what the index promises: either higher returns, or more stable returns. When a stock runs up quickly, it makes me think that the undervaluation has been detected, and it’s then back in line with the index. At that point, why take the risk the individual stock presents?

That leads me to my very general exit strategy: if a stock runs up to the point where I think it has become overvalued, I’ll sell. If it runs up quickly to the point where I think it’s fairly valued, I’ll sell (on the theory that a fast rise might precede a pull-back). If the business conditions change to where I think the stock will underperform (or where the new valuation would be overvalued), I’ll consider selling. Otherwise, I’ll sell when I need the money: hopefully not until retirement!

It’s good to have your moves in the market well-thought-out: it’s very easy lose money by making impulsive moves. I was tempted to quantify some of my exit strategy pondering: for instance, a 20% rise, or a very quick 10% rise seems to be enough to get me into profit-taking mode, and I was thinking I should just make that a rule guideline for myself. The thing is, it’s all relative to what I think the market might do, and just how much further I think a stock has to go. A lot of things are down to the point where they would need a doubling or more just to get back to where they were this time last year — in which case, a sale after rising 20% in a month, as decent as that would be, might be hasty.

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