Thought some might find this interesting..From our free Newsletter (tdesk@yamner.com Subject: SUBSCRIBE)
btw...there is a great thread, Final Frontier,
exchange2000.com
hosted by Irby who probably has the greatest and most extensive list of financial-related websites around. well worth your time.
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Lessons from the Trenches
Sell Side Decision-Making:
Most investors find the decision to sell a stock far more difficult than the decision to buy it. Investors initiate positions as they feel there is an attractive return relative to the risk associated with an investment. Yet once initiated, stockholders often find themselves captive to emotion and psychological ties to the stock which makes the decision to sell an event, which often results in post-sale dissatisfaction.
When a security moves lower, or is subject to earnings disappointments or other troubling news, investors often are reluctant to sell positions as they may in fact be in a loss position and would rather wait for the stock to recover. Investors hate selling stocks at or near their lows. The prior two statements make a few grand assumption, one, that the stock actually recovers and secondly, that you are at or near the lows.
While you can be reasonably comfortable that you will never lose more than your investment, a grim reality of investing is that stocks go to zero. The clich‚ 'Good gets better and bad gets worse', applies.
Some investors limit their loss in any position by setting stops, either hard stops placed on the books with their brokers or mental stops which they manage themselves. A sell stop order is a order which instructs a firm to sell the security when it hits a particular price below its current price. This assumes the stock is falling so as to hit the lower price.
Traders and investors with firm, rigid discipline may decide that their maximum loss exposure is 20%, that is, they will hold the stock as it moves lower, but when their loss hits or exceeds 20%, they will sell the position. While they are exposed to bad news and a possible gap down, for the most part, they are committed to selling the security when the stock falls 20% below the price at which they bought the position. Such traders defend such rigid adherence to stops as a disciplined approach to an incredibly dynamic marketplace.
Most investors though do not utilize such rigid trading strategies. Many would rather evaluate their positions at each point along the way, determining how to value the position given news and market conditions. In their analysis, some may in fact look at lower prices as more attractive prices.
As money managers and investors who currently favor an over-weighting in small and mid-cap stocks, particularly value oriented plays, we tend to concur that there are often some great values that come available in the market extremes. We are also quite aware of the rarity and risk of picking bottoms, the patience required when bottom fishing, and the frustration when your choices move lower while a strong market moves upward.
It is critical to understand that cheaper prices do not necessarily, and often do not mean better prices. Continued analysis of the stock , the sector and the reasons for the price depreciation are critical in determining whether cheaper is better or just cheap.
On the other side of the spectrum is the situation an investor faces when evaluating a position that returned substantial gains. Investors often feel emotionally tied to these securities because they have provided substance to the investor and given the investor tangible gains. Such investors feel that incredible performance will lead to even further performance. Even in light of steep valuations, investors sense that certain stocks are just winners and should be kept regardless of valuations or concern in the broad market.
Having over 22 years servicing the financial community, we come to deal with investors' personalities regarding these issues each and every day. As well, we face the same situations when it comes to our own personal investments as well as our Managed Portfolios.
We approach such a situation as follows: First, we know that we will never pick the bottom in a stock nor sell at the top. The risks associated with such timing are simply to great. Rather, when a position has performed well, we continue to evaluate the position given its return on investment, its various price ratios, its percentage in the particular account, tax consequences, its performance relative to its peer group, etc.
We are very comfortable taking profits in a position, either liquidating it in whole or thinning out as it moves higher. We will often hedge positions through the use of covered calls. As we find it improbable to pick tops, we average out of a position as it appreciates, thus raising cash and still maintaining reasonable equity in the company. If, in fact the stock keeps performing, splits and appreciates, our equity continues to grow. Nonetheless, we will not hesitate to reduce risk associated with allowing a position to simply appreciate and dominate an account. A earnings release or other disappointing news imprints the pain of having a tremendous amount of capital in a disaster de' jour.
How each position works outs, whatever choices we make, there is one rule we never breach. We don't beat ourselves up for our mistakes. We don't spend time playing the 'woulda', coulda', shoulda' game. Without doubt, there will be long positions that perform wonderfully, some that move lower, and some that tank. There will be times that we sell positions and they scream higher. Given the market's move over the past two years, regardless of solid arguments about spiraling valuations, any sales in leading companies such as GE, MRK, DELL, INTC, MSFT, WLA, IBM, have, in retrospect, cost us significant gains.
We do, though, evaluate why we sold, why we bought, where were we wrong, what we did right, what can we do to improve the next time around, not with the desire to agonize over an error but as to whether our models and our decision making process was valid. If, in fact, our reasons for selling and reducing positions were correct, we applaud the model, which has performed wonderfully over the years, and thank the markets for the gains we in fact did experience. |
