Monday, July 16, 2012

For goodness sake, have an exit strategy!!!

I have received a bit of abuse in the past on bulletin boards when I have declared that I have closed a long position on a particular stock. I've been accused of de-ramping a stock (whatever that means) along with getting plenty of ridicule about sticking to my rules and acting on an exit signal at the appropriate time.

In particular, I recall getting a load of abuse when I exited a certain UK stock in early 2011 after riding the stock on the way up, and then exiting shortly after the stock peaked, per the system rules. According to others, the stock price was going to the moon, fuelled by a mixture of faultless underlying fundamentals, future prospects and good management.

Since then, what has happened? Well, the directors sold a chunk of shares that marked the absolute top of the price rise (my exit signal was given a few days after that). From there, it has been a slow, choppy descent to where the stock price is now, losing about 80% of its value from the peak. The same management are now classed as incompetent, with (apparently) a queue of angry shareholders lining up to attend the next AGM.

Well, all I can say in response is the following:
  • Shares can go down as well as up, and a lot of investors seem to conveniently forget that when they get involved in certain stocks. I can reel off plenty of examples where the above scenario has been played out;
  • The fundamentals relating to individual companies CAN change, without you necessarily knowing - a press release or earnings report may be too late;
  • People should take off the rose tinted glasses, and accept that if they lose a set amount of their capital then they are wrong on a particular investment or trade, and take a loss;
  • At the end of the day, you cannot blame incompetent management, dodgy brokers, short sellers or anybody else if you lose in the markets - the only person that can be blamed is YOU.
These type of people are similar to those who rode Enron all the way up to $100 per share, and then all the way down to below $1 (probably buying up even more stock on the way down). Preservation of capital, whether you are a trader, investor, scalper or any other type of market participant should be your No. 1 priority, NOT a rose-tinted opinion about how much profit you will make from an individual trade or investment.

A trend follower has no qualms about taking a loss - we participate in the markets not to be proven right, but to make money. We only ride our profits until we get an exit signal. If we are wrong, we take out medicine, and move onto the next trade.

In the particular stock I am referring to above, I know some of the people who were good at giving out stick to others had taken out second mortgages to buy up shares in this particular company. That reminds me of stories where investors/traders in the US who got caught up in hysteria in 1999/2000.

I do not take delight in writing posts such as these. All I can say is that, if people do not have an appropriate strategy to preserve their capital, or to exit a position when they have lost money, on a cocktail of hope and greed that the stock will be a multi-bagger, then they should not be participating in the markets.

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