Tuesday, November 16, 2010

Calling all investors

If you boil trading or investing down to its bare bones, you should be opening a position when the individual feels there is a legitimate reason to invest your money, and you should exit that position then that reason no longer exists.

In the case of trend following, you would therefore enter a trade when a trend is forming or has started, and you would exit the trade when that trend has finished.

I'm a little more confused when it comes to investors.

You quite often see posts in forums and bulletin boards about people who have been stuck in positions for months or even years, being well 'underwater' and are 'long-time sufferers in this stock'. Quite often these people have also averaged down on their investments, to lower their average cost price. It also means that their capital is tied up when other, more profitable investments pass them by. More than frustrating for them, I'd imagine.

These people obviously have had a reason to invest in the past, but how do they guage when to exit?

I assume it is based purely on the fundamental data, or news releases that the company make. But surely a significant drop in the share price must make investors question that wisdom. Take a stock that's worth say 500p. When do you start to question whether you should stay invested - 400p? 250p? 0p? Ask investors of stocks, where a company's demise has been swift and complete, whether this approach works.

As I only allocate a small percentage of my equity to each position, I have an 'emotional indifference' to each position I hold. If it works out, great. If not, I exit the trade and move on. However, I get the feeling that these investors allocate more of their capital to each position, and therefore have more to lose when a company share price declines and then goes nowhere.

So, any investors reading this - I'm genuinely interested to know. What is your exit strategy?

1 comment:

  1. extend and pretend, just like the .gov/fed/munis/ everybody else.