The rational long-term investor will know why he or she owns a particular security, and sell only if the underlying story changes.
How about if the valuation has gone sky high?? Anytime one buys a security, one must have an exit strategy. The majority owners and VC's of the companies have an exit strategy even before they consider investing.
Hard to say, really. After this past year, I wouldn't want to scoff at people who sell when they feel that valuations are unreasonable. But I have little faith in my own ability to spot an unreasonably high valuation.
It's not just that longs get caught up in hysteria--although that is likely part of it. It's also that things change, and it's hard to have a fixed exit point. For instance, I am (don't laugh) long RMBS, and I feel that their "fair value" is around $200-$300. If it were to get somewhere around that range, I'd likely sell. The problem is, what if it's a year from now, it's around that range, and the RMBS story has changed for the better in some way? All of a sudden, it's trickier to figure out what to do, because "fair value" has probably changed.
But hell, that's a problem I'd love to have...
Furthermore, as much as I think there's some wisdom in setting target prices, as they can insulate you from hysteria, if you're disciplined (I know this looks like it's going through the roof, but I promised myself I'd sell at 80), it can also be a bit too constraining. What if it doesn't quite hit your target, but you're feeling nervous? It's tough; we as investors want to regulate ourselves, but not to death.
Also, aside from RMBS, most companies I like are companies with (I believe) tremendous long-term prospects, and it's just *SO* hard to come up with an exit point. For instance, if you had invested in CSCO in 1990, with a P/E of 9, and then it skyrocketed immediately to a P/E of 180. That's a 2000% increase, with a huge P/E. And yet, it would have been about a 50-bagger from there for the rest of the decade. Obviously, that's an extreme case, but I try to invest in extreme cases.
Finally, as for the VC's. The exit strategies they look for aren't really price points, but broad strategies--acquisition, IPO, whatever. In part, it's just to make sure that these companies won't just tread water. VC's know better than anyone that ultimate values are really hard to predict well in advance. I don't know for sure, but of all the big players I know of (Khosla, Doerr, Bezos, Yang, Filo), none exited their $1 billion+ holdings in early 2000, to the best of my knowledge. |
