A personal history of selling strategies - 1
Early Unsuccessful Selling Strategies
Over the years (the last 8 or so of which I'd classify myself as an active trader), I have struggled with when to sell stocks. I've had some vague ideas about when to sell, but haven't held fast to them until the last year or two. Part of the reason is that I wasn't convinced my selling "strategies" were any good, so rules became guidelines, guidelines became procrastination and procrostination became lost profits -- if there were ever any profits to be lost.
On the off chance that my experiences might provide others with some assistance, here is a brief evolution of some of my practice and thinking, roughly in chronological order.
1. The first time I bought a stock, I did not give any thought to when I might sell it -- either with gains or losses -- until after I owned it. Amazingly, this approach continued for awhile. Generally, I did what most beginners did, held onto my losers with the naive sense that they would come back and take profits on my strong performers early. Unfortunately, this was the mid-1980s, I knew nothing about the stock market, suffered from having been taught undergraduate economics by a Marxist, and was betting on a turnaround in the farm equipment industry. Needless to say, this approach was a complete failure...
2. My first selling guideline was to take the temperature of my stocks soon after I bought them, then watch for two things. If they made money and turned down, I would sell them just before they turned into a loss. If they were already losers, I'd hold them until they turned into a small proft. Theoretically, this allowed for consistent winners to accumulate indefinitely, though I never recall this happening. In reality, I usually gave back most or all of my profits on winning trades and despaired when I sold my losers after they were down 50-75%. OK, so my stock selection needed some work too...
3. After a several year hiatus from stocks, during which I became a mutual fund devotee, slept much better and made more money on my investments, I slowly moved back to stocks in the mid-1990s. Here I finally came up with a selling strategy that I believed in. I decided that no matter what stock I purchased, I would sell it after a fixed % gain. I played around with a 20% gain and a 30% gain (I was buying and selling almost exclusively blue chips at the time), adjusted by the time it took for the the gains to occur (a quick 20% gain would trigger a sell, while a slower price rise might require a 30% gain.) If I had thought about it, I probably would have devised some sort of monthly or annual return %, but I didn't go that far. The bottom line was that I was finally making money, but I noticed that quite a few of my former holdings were continuing to rise after I sold them.
4. Next came a hybrid evolution of the fixed % strategy, in which I set price targets rather than % gain targets. I started experimenting with a broader range of stocks, including more volatile technology stocks, and decided that some stocks had a much greater potential for appreciation and therefore needed higher price targets to avoid leaving a lot of money on the table. I attributed the price appreciation potential to the sector as well as the market cap and reasoned that small tech companies had the largest potential upside. I set target prices to sell each of my holdings at (did not put in a limit order), with blue chips at +20-30%, rounded up to the a price ending in 0 or 5 and tech companies with a +30-50% gain, rounded up to either a whole dollar amount or a price ending in 0 or 5.
5. I tweaked the price profit target strategy when I realized I was still leaving too much money on the table, so I decided to implement a strategy to let my winners run a little. When selling, I would only sell my original cost basis and let my profits run. Where I was playing with "house money" I would be more aggressive than when I was playing with money that formed my cost basis. In retrospect the distinction seems highly artificial, but, at the time, it enabled a "selling rule" and I need rules for when to sell and how much. This strategy was generally successful, but it ended up generating quite a few small positions that represented my leftover profits. When should I sell these? Were the commissions to high to warrant the increased transactions?
6. This continued to work until I made a critical decision to stuff my portfolio full of internet stocks in 1996-7. There weren't many to choose from at the time, but I did manage to get in on BVSN early. Whenever I finally decided to sell it, I went to check the price and noticed that it had gone up again. I didn't have the heart -- or the financial willingness -- to part with a stock that went up 5X in 1998 and then 15X again in 1999. This happened again and again and again. BVSN continued to go up and for once my indecision seemed to help me. I needed some sort of selling strategy, though, because BVSN rapidly became a larger and larger part of my net worth -- well over 50%. After one short-term correction, I finally got the nerve to impose a rule that no stock should be more than 40% of my portfolio and bid adieu to some BVSN. This rule became easy to enforce and has evolved over the years to be 35%, 30%...now down to 15% of the maximum position over all of my portfolios. This forces some profit taking, yet I can still make large bets with options.
NEXT: What I learned about selling during and after the bubble |
