Author Topic: Exit Strategy  (Read 8650 times)

tyler1215

  • 5 O'Clock Shadow
  • *
  • Posts: 39
Exit Strategy
« on: September 10, 2014, 03:39:52 PM »
I am asking for some advice with an exit strategy for investing in stocks and ETFs. 
I have a loss strategy but not a gain strategy.

My loss strategy is to DCA until the shares have lost 50% of its initial value
when I first bought it. Then it's a hold until it regains back to its initial
value or never sell, but don't buy back in unless analyst project a 12-month
return to its the initial buy price.

I'm unsure of when to sell shares that are going up in value.

My mother has a strategy that she will buy and hold, never selling a loss, until
the share has gained 10 points. Then she will sell and walk away, never thinking
that she should have waited to sell for a larger gain.

I am proposing to DCA until the share has doubled in initial purchase price.
Then sell 50% of my holdings to lock in the gains and go back to DCA.

I would like to hear some thoughts to my proposal, others' strategy, and even
some comments such "you're in over your head. Do more research, start here..."

Thank you in advance, I appreciate the input.

ioseftavi

  • Bristles
  • ***
  • Posts: 401
  • Location: NYC
Re: Exit Strategy
« Reply #1 on: September 10, 2014, 04:14:35 PM »
I can't comment towards active trading strategies, because I don't actively trade.  But if you're trading stocks based on fundamental analysis, your trading should be based on price compared to estimated intrinsic value.  That alone should drive your decisions - not the percentage that the stock has gone up or down.

If you think a stock is worth $100 per share, and you buy it when it's $66 (33% discount), selling because it's gone up in price by $10 would be silly.  Yes, you've made a gain.  But if your analysis was conservative and accurate, you've still got a ways to go before it gets to 'fair value'.

Alternately, let's say you buy the same stock at $66, and you think it's worth $100.  A few days later, the company puts out a press release: its new product causes fires.  In orphanages.  With crippled kids.  The stock drops to $60 per share.  Now, you re-run your numbers after reading the info.  Maybe even you go the extra mile and talk to your actuary friend and call the company's investor relations department.  After factoring in their estimated liability for this awful new product, let's say that the company is worth $50 per share - NOT the $100 you estimated.  So now, according to your research, the stock is overpriced by $10.  Why would you dollar cost average into this stock just because it went down?

If you are going to invest in individual companies, seriously examine the companies that you want to invest in and attempt to figure out a conservative estimate of what the business is worth.  This is your "intrinsic value".  When a company trades for a lot less than its intrinsic value, you can consider it as a buying target on your shopping list.  When a company is trading for above its intrinsic value, you should consider selling some or all of the position (if you own it).  The greater the deviation from a conservatively calculated intrinsic value, the more seriously you should consider taking action (discount to IV = buy.  Premium to IV = sell).

Intrinsic value is a bit like calculating the price for a used car - you're going to come up with an "approximate" number that seems pretty fair.  You won't nail it to the penny; that's ok.  But you'll figure out a price at which you feel the car is "fair", a point at which it's "probably pretty cheap", and a point at which it's "too damned expensive."  And that's about how it should be with stocks - you won't nail it to the penny, but you'll come up with a "fair" range for the stock, and when it's far outside that price?  That's when the stock starts to be a bit more interesting and you might consider buying or selling some.

Trading strategies like you've discussed - based on percentage movements - has nothing to do with ownership in a business.  Remember that you don't just own pieces of paper that represent shares.  You own a slice of a company.  That company may be fairly priced, over-priced, or under-priced.  If you are going to own individual stocks - you should have an opinion on the prices of companies you own and how their stock price relates to your 'fair' price for the company.

I know that many people on the MMM boards swear by indexing, and that's cool with me - I index the majority of my portfolio.  But for the portion of your portfolio that you actively manage?  Please, treat it like an actual job, because it should be one if you're going to attempt to do it.  You do not need to have fifty pages of discounted cash flow spreadsheets for each stock you own.  But a few pages of your own research, and your own calculations, showing why you think a stock is worth owning?  That would probably help you take the exercise more seriously and keep a closer eye on your individual stock positions.

So my suggestion would be: adopt value investing tenets, if you're going to invest in individual stocks.  Your investing should be based on more than just a hunch, or a chart, or percentage movements in a certain direction.  You should be able to explain what your companies do, why you own them, and at what prices you would consider buying more or selling.  If you want more info, I can send you a list of suggested reading.  If this piques your interest at all and you want to just scratch the surface, you can go borrow "The Intelligent Investor" by Ben Graham from your local library.

Good luck!
« Last Edit: September 10, 2014, 04:17:01 PM by ioseftavi »

sirdoug007

  • Pencil Stache
  • ****
  • Posts: 587
  • Age: 39
  • Location: Houston, TX
Re: Exit Strategy
« Reply #2 on: September 10, 2014, 04:22:46 PM »
The way you are talking sounds more like you are at a roulette table than investing in the stock market.

My suggestion would be to read this and then think about how much more you think you can actually earn by active trading: http://www.washingtonpost.com/business/so-youre-the-worlds-greatest-trader-taxes-will-fix-that/2014/07/25/7d358bde-1105-11e4-98ee-daea85133bc9_story.html

And re-read the jlcolinsnh stock series: http://jlcollinsnh.com/stock-series/

Setting up your investment method for tons of trading is setting yourself up for failure.  No one can predict the future.  Even when stocks "should" move a certain way they often do not.  However, in the long run, the total stock market will rise.

tyler1215

  • 5 O'Clock Shadow
  • *
  • Posts: 39
Re: Exit Strategy
« Reply #3 on: September 10, 2014, 04:47:05 PM »
ioseftavi:
You took a shot at me and put me in my place.  I thank you for that.  I often catch myself being the smartest person in the room and I need to get out of the room to be brought back down and realize I have more to learn.  I would like to take you up on your offer for suggested reading topics.  I do index a portion of my portfolio but I prefer to take the higher level of risk in individual stocks.  I accept the risks based off of my personality and engineering background to experiment and find a better way than everyone else (knowing that I will probably lose).  I spend all of my free-time researching and learning more about the market and companies, at least 4-6 hours per day 7 days a week. 

sirdoug007:
To me, it doesn't seem like I'm at a roulette table.  I'm no day trader by a long shot.  I did my initial research for the last six months and came up with a list of companies that I found value in holding.  To me, an average-joe trying to win through active trading is a losing game.  Like you said, in the long run the total stock market will rise and I prefer to hold for years before actually selling any of my holdings.

Everyone, please keep the punches coming, even in my defenses/explanations.  It's the only way I can properly learn.

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2260
  • Location: EastCoast
Re: Exit Strategy
« Reply #4 on: September 10, 2014, 04:52:33 PM »
If you think a stock is worth $100 per share, and you buy it when it's $66 (33% discount),

I always find statements like these funny. So you (1 person) think the stock is worth $100. While every other investor in the world (millions of people) think it's worth $66. What are the odds that you are right and everyone else is wrong? If it was "worth" $100, the price would be $100. Since it's not there is a reason.. The endless calculations of "intrinsic value" by amateurs on seeking alpha are quite amusing in this context

If I were to buy a stock (which I have done) personally I think a pretty good bet for its worth is whatever price it's trading at right now.

ioseftavi

  • Bristles
  • ***
  • Posts: 401
  • Location: NYC
Re: Exit Strategy
« Reply #5 on: September 10, 2014, 04:57:09 PM »
ioseftavi:
You took a shot at me and put me in my place.  I thank you for that.  I often catch myself being the smartest person in the room and I need to get out of the room to be brought back down and realize I have more to learn.  I would like to take you up on your offer for suggested reading topics.  I do index a portion of my portfolio but I prefer to take the higher level of risk in individual stocks.  I accept the risks based off of my personality and engineering background to experiment and find a better way than everyone else (knowing that I will probably lose).  I spend all of my free-time researching and learning more about the market and companies, at least 4-6 hours per day 7 days a week. 

I didn't mean to "take a shot at you"!  But I'm glad you found some value in my essay.  If you're spending hours per day researching, than that's a good start: enthusiasm is a great teacher.  I would just caution you: that there are many, many strategies out there (charting, day trading, some of the more esoteric option strategies) that can suck up huge, huge amounts of time but generate very little value in terms of actually being a better investor (or even reducing risk).

Kick off your reading list with The Intelligent Investor.  I'm biased as all hell, but I think it's the best book on individual stock investing that's ever been written.  I'd suggest reading the oldest edition you can find, but the more recent one that Jason Zweig annotated with his commentary is also good.  If you get through that and you're still interested, I can direct you to some of the more nuanced books in the genre.

ioseftavi

  • Bristles
  • ***
  • Posts: 401
  • Location: NYC
Re: Exit Strategy
« Reply #6 on: September 10, 2014, 05:10:32 PM »
If you think a stock is worth $100 per share, and you buy it when it's $66 (33% discount),

I always find statements like these funny. So you (1 person) think the stock is worth $100. While every other investor in the world (millions of people) think it's worth $66. What are the odds that you are right and everyone else is wrong? If it was "worth" $100, the price would be $100. Since it's not there is a reason.. The endless calculations of "intrinsic value" by amateurs on seeking alpha are quite amusing in this context

If I were to buy a stock (which I have done) personally I think a pretty good bet for its worth is whatever price it's trading at right now.

In my example, I said "33% discount", but I think if you re-read it, you can see I meant "33% discount to what you think it's worth".  By no means does that mean that the damn stock is actually going to be worth $100 someday - and you are absolutely correct that at the moment you bought it, the quoted price is most certainly 66 bucks.  And as far as your 'intrinsic value' - you could be missing a huge part of the equation, or have calculated using a methodology that isn't at all relevant or appropriate, you're not appropriately factoring in certain key risks, etc etc. 

I'm not saying that calculating intrinsic value is going to result in a value, to the penny, that is 'correct' for a stock at a given point in time.  But calculating a conservative value for what you think a company is worth, given its assets, earnings power, prospects, and risks - that seems like a decent way to arrive at something approximating a fair price for the stock.  And buying at a discount to my conservatively calculated "intrinsic value" seems like it'd be a further help (Graham's "Margin of Safety").

Obviously, the fact that you've done a bit of math and research to back up your position is no guarantee that you'll end up doing well - or even average.  But holy hell, if you're going to pick individual stocks, I'd rather stick with a methodology that my common sense agrees with, as opposed to buying or selling because stocks have moved a certain amount in a certain direction.

johnhenry

  • Bristles
  • ***
  • Posts: 304
  • Age: 39
  • Location: Midwest
Re: Exit Strategy
« Reply #7 on: September 11, 2014, 07:55:16 AM »
I am asking for some advice with an exit strategy for investing in stocks and ETFs. 
I have a loss strategy but not a gain strategy.

My loss strategy is to DCA until the shares have lost 50% of its initial value
when I first bought it. Then it's a hold until it regains back to its initial
value or never sell, but don't buy back in unless analyst project a 12-month
return to its the initial buy price.

I'm unsure of when to sell shares that are going up in value.

My mother has a strategy that she will buy and hold, never selling a loss, until
the share has gained 10 points. Then she will sell and walk away, never thinking
that she should have waited to sell for a larger gain.

I am proposing to DCA until the share has doubled in initial purchase price.
Then sell 50% of my holdings to lock in the gains and go back to DCA.

I would like to hear some thoughts to my proposal, others' strategy, and even
some comments such "you're in over your head. Do more research, start here..."

Thank you in advance, I appreciate the input.

You've chosen an odd forum to ask for advice on market timing. :)

I think I overheard two old women discussing this same investment strategy just the other day!! They were walking from the nickel slots to the penny slots. :)

But here's some real advice on locking in gains. 
Invest in index funds across diversified set of asset classes.

If, after one year, you have an opportunity to realize some LTCG, try to do so in a tax year when you are in the 15% bracket so you can realize the gain and pay 0% in federal tax.  Rebuy the same index funds as soon as the fund and/or firm will allow.

P.S. I hope your mother's broker/firm sends her a box of chocolates for all the commissions generated by her strategy.  And good luck developing one yourself that doesn't have high trading costs or tax consequences!




hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1218
  • Age: 39
  • Location: Texas
Re: Exit Strategy
« Reply #8 on: September 11, 2014, 08:41:02 AM »
As for Value Investing/Buy and Hold, the reading list is as follows:

The Intelligent Investor - Ben Graham (already mentioned)
Security Analysis - Ben Graham/David Dodd
Common Stocks and Uncommon Profits - Philip Fisher
Berkshire Hathaway Letters to Shareholders - Warren Buffett
One Up on Wall Street - Peter Lynch
You Can Be a Stock Market Genius - Joel Greenblatt
Why Stocks Go Up and Down - William Pike

Because you mentioned you have an engineering background, I believe you'll find the following books helpful:

The Little Book that Still Beats the Market - Joel Greenblatt
Quantitative Value - Wesley Gray - you'll also enjoy his website www.alphaarchitect.com

Most of the engineering background traders I know of, sway towards the quant/mechanical styles. They are good at modeling, programming and statistics. They backtest their ideas and try to nail down the rules into a 100% (or almost) mechanical system. Quant value, trend following, momentum trading, technical analysis, mean-reversion, various option strategies and pairs trading are specific styles that come to mind. The Market Wizards series of books are good intros into the various styles and personalities that successful traders and investors have used.


SunshineGirl

  • Pencil Stache
  • ****
  • Posts: 749
Re: Exit Strategy
« Reply #9 on: September 11, 2014, 10:01:30 AM »
I'm like you in that I could and have easily let myself come up with all sorts of strategies and plans - I really *like* doing the planning. And I've also read all the wise books and blogs advising against it. And yet, still...it's fun and invigorating, so this is what I do:

80+% of my investable assets are Vanguard mutual funds. I personally have the vast majority in Wellesley, but most new purchases these days are half Wellesley and half health care. I fall on the conservative side of Vanguard's asset allocation recommendations, but I feel very solid with these choices.

Because I like buying stock, I am also building a stock portfolio with Sharebuilder, and what I'm doing is buying the stocks and ETFs I want over time until I own the same amount of each. I presently own about ten stocks, and will likely buy up to ten more. Creating my own mutual fund, if you will. I realize this is completely unnecessary, but I don't anticipate it will hurt me much financially. I have rules for which stocks I buy having to do with free cash flow and low debt, so they tend to be stable companies. I don't anticipate selling any for a long time, but in terms of which I will buy next, it would be whichever I need to "catch up" on to be equal to the others.

i.e.

Stock A = $1000
Stock B = $1200
Stock C = $800

I would buy stock C until it catches up to stock A, and then stocks A and C until they catch up to B.   

Which is a longwinded way of saying: I don't plan to sell. I don't have an exit strategy. If the market all of a sudden got crazy volatile, I would put limit orders on everything to lock in my gains.
« Last Edit: September 11, 2014, 10:03:11 AM by SunshineGirl »

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2260
  • Location: EastCoast
Re: Exit Strategy
« Reply #10 on: September 11, 2014, 10:01:50 AM »
If you think a stock is worth $100 per share, and you buy it when it's $66 (33% discount),

I always find statements like these funny. So you (1 person) think the stock is worth $100. While every other investor in the world (millions of people) think it's worth $66. What are the odds that you are right and everyone else is wrong? If it was "worth" $100, the price would be $100. Since it's not there is a reason.. The endless calculations of "intrinsic value" by amateurs on seeking alpha are quite amusing in this context

If I were to buy a stock (which I have done) personally I think a pretty good bet for its worth is whatever price it's trading at right now.

In my example, I said "33% discount", but I think if you re-read it, you can see I meant "33% discount to what you think it's worth".  By no means does that mean that the damn stock is actually going to be worth $100 someday - and you are absolutely correct that at the moment you bought it, the quoted price is most certainly 66 bucks.  And as far as your 'intrinsic value' - you could be missing a huge part of the equation, or have calculated using a methodology that isn't at all relevant or appropriate, you're not appropriately factoring in certain key risks, etc etc. 

I'm not saying that calculating intrinsic value is going to result in a value, to the penny, that is 'correct' for a stock at a given point in time.  But calculating a conservative value for what you think a company is worth, given its assets, earnings power, prospects, and risks - that seems like a decent way to arrive at something approximating a fair price for the stock.  And buying at a discount to my conservatively calculated "intrinsic value" seems like it'd be a further help (Graham's "Margin of Safety").

Obviously, the fact that you've done a bit of math and research to back up your position is no guarantee that you'll end up doing well - or even average.  But holy hell, if you're going to pick individual stocks, I'd rather stick with a methodology that my common sense agrees with, as opposed to buying or selling because stocks have moved a certain amount in a certain direction.

We don't need to get bogged down in this, but I'm just curious about the thought process. There are thousands of highly-paid professionals, with PhDs and years of schooling doing exactly this (calculating IV), for 14 hours a day! And they clearly found the stock is worth $66 (in this example). Why not take advantage of work done by people with much more time and resources that I have? How do people imagine that sitting at home with excel and a 10-k filing they'll discover something that these firms haven't? Sounds absurd to me. That's the part I don't understand.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1218
  • Age: 39
  • Location: Texas
Re: Exit Strategy
« Reply #11 on: September 11, 2014, 10:16:47 AM »

We don't need to get bogged down in this, but I'm just curious about the thought process. There are thousands of highly-paid professionals, with PhDs and years of schooling doing exactly this (calculating IV), for 14 hours a day! And they clearly found the stock is worth $66 (in this example). Why not take advantage of work done by people with much more time and resources that I have? How do people imagine that sitting at home with excel and a 10-k filing they'll discover something that these firms haven't? Sounds absurd to me. That's the part I don't understand.

For large cap stocks, you are mostly correct. However, there aren't thousands of highly-paid professionals looking into Earthstone Energy. Individual investors have an edge in small-cap and micro-cap stocks (that the big guys can't touch), as well as products that you are familiar with. As in, I work in the ERP software industry so I'm going to have some sense of insider knowledge that an analyst will not.

Individual investors also have the freedom to not do anything if there's nothing to do. Most professionals don't have that flexibility, they 'have' to always be doing something otherwise their investors will pull their money. There are advantages and disadvantages to being an individual investor. It's all about recognizing your edge and exploiting it.

tyler1215

  • 5 O'Clock Shadow
  • *
  • Posts: 39
Re: Exit Strategy
« Reply #12 on: September 11, 2014, 10:38:46 AM »

You've chosen an odd forum to ask for advice on market timing. :)

I think I overheard two old women discussing this same investment strategy just the other day!! They were walking from the nickel slots to the penny slots. :)

But here's some real advice on locking in gains. 
Invest in index funds across diversified set of asset classes.

If, after one year, you have an opportunity to realize some LTCG, try to do so in a tax year when you are in the 15% bracket so you can realize the gain and pay 0% in federal tax.  Rebuy the same index funds as soon as the fund and/or firm will allow.

P.S. I hope your mother's broker/firm sends her a box of chocolates for all the commissions generated by her strategy.  And good luck developing one yourself that doesn't have high trading costs or tax consequences!

To me, I'm not looking to time the market.  All of my research shows that it's a losing strategy for the average investor.  It is a long-term strategy.  But I can see how it comes off as day-trading or market timing, my explanation doesn't really clarify that.

My mom does everything through her own firm.  But I would appreciate it if everyone could leave my mother out of the conversation.  That is easily a sore subject for everyone.  I included a very rudimentary explanation of what she told me many years ago.  Thank you.

tyler1215

  • 5 O'Clock Shadow
  • *
  • Posts: 39
Re: Exit Strategy
« Reply #13 on: September 11, 2014, 10:56:20 AM »
SunshineGirl:  Thank you, you have understood that this is my spare fund strategy.  Like you, I get invigorated from watching the individual stocks make massive moves within a given day.

My strategy is concentrated on the long-term, but reflecting on the strategy made me think "how do I make money off of my investments?"  Buying stocks or index funds is the easy part, but I had not really seen discussion on exit strategies.  I was at a lost for the scenario of someone has bought funds and stocks and built a portfolio worth a million dollars, but how do they get to that million dollars?  If I sell stocks to lock in gains, do I purchase index funds as a safer bet against volatility or place it savings accounts for buying investment properties, CDs, or just live off of the money?  Those last questions can be ignored to keep from going down a rabbit trail from the main topic.  It is easy to find investing strategies and advice on how to build a stache on this forum, but I have yet to see how people get to the stache for retiring.  Perhaps that was my real question with this post.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1218
  • Age: 39
  • Location: Texas
Re: Exit Strategy
« Reply #14 on: September 11, 2014, 11:06:44 AM »
Unfortunately when most people talk about strategies, they talk about entries. However, IMO it's the exit strategy that is more important than entry. Here's the importance in order:

1) The markets/stocks you'll trade
2) Position sizing
3) Exit strategy
4) Entry strategy

First is finding the right stock or market to be invested in the first place. Plenty of books try to tackle this but it IS the most important. Your entries and exits could suck, but if you find yourself in the right stock, you'll probably still make money.

Second is position sizing. There aren't many books that talk about this unfortunately. Yet it makes a HUGE difference on your returns. Buying $100 worth of AAPL 10 years ago, when your account is $50k, didn't help you out that much. But buying $5k of AAPL helped you pay off your house, even if all your other investments literally went to zero.

Third is exit strategy. The reason why I list it as more important than entry is that unless you sell at the right spot, all your gains are just on paper. If you bought AAPL at $2 (split-adjusted) 10 years ago, today you are doing great. But if AAPL went into secular decline and turned into the next Blackberry or something in the future, all those gains disappeared and you are left with almost nothing. You must decide your timeframe and do the research into different exit strategies. It could be that the story has changed, the dividend was cut, the price dropped below the 12 month moving average, whatever. I've seen systems that literally entered the market randomly, yet had intelligent position sizing and a trailing stop strategy and it made money. From completely random entries.

Lastly is the entries. Plenty of others throughout the past 100 years have already talked about this so there's no need for me to add.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1218
  • Age: 39
  • Location: Texas
Re: Exit Strategy
« Reply #15 on: September 11, 2014, 11:09:01 AM »
Unfortunately when most people talk about strategies, they talk about entries. However, IMO it's the exit strategy that is more important than entry. Here's the importance in order:

1) The markets/stocks you'll trade
2) Position sizing
3) Exit strategy
4) Entry strategy

First is finding the right stock or market to be invested in the first place. Plenty of books try to tackle this but it IS the most important. Your entries and exits could suck, but if you find yourself in the right stock, you'll probably still make money.

Second is position sizing. There aren't many books that talk about this unfortunately. Yet it makes a HUGE difference on your returns. Buying $100 worth of AAPL 10 years ago, when your account is $50k, didn't help you out that much. But buying $5k of AAPL helped you pay off your house, even if all your other investments literally went to zero.

Third is exit strategy. The reason why I list it as more important than entry is that unless you sell at the right spot, all your gains are just on paper. If you bought AAPL at $2 (split-adjusted) 10 years ago, today you are doing great. But if AAPL went into secular decline and turned into the next Blackberry or something in the future, all those gains disappeared and you are left with almost nothing. You must decide your timeframe and do the research into different exit strategies. It could be that the story has changed, the market has been saturated, the dividend was cut, the price dropped below the 12 month moving average, whatever.

I've seen systems that literally entered the market randomly, yet had intelligent position sizing and a trailing stop strategy and it made money. From completely random entries.

Lastly is the entries. Plenty of others throughout the past 100 years have already talked about this so there's no need for me to add.

johnhenry

  • Bristles
  • ***
  • Posts: 304
  • Age: 39
  • Location: Midwest
Re: Exit Strategy
« Reply #16 on: September 11, 2014, 01:47:10 PM »

You've chosen an odd forum to ask for advice on market timing. :)

I think I overheard two old women discussing this same investment strategy just the other day!! They were walking from the nickel slots to the penny slots. :)

But here's some real advice on locking in gains. 
Invest in index funds across diversified set of asset classes.

If, after one year, you have an opportunity to realize some LTCG, try to do so in a tax year when you are in the 15% bracket so you can realize the gain and pay 0% in federal tax.  Rebuy the same index funds as soon as the fund and/or firm will allow.

P.S. I hope your mother's broker/firm sends her a box of chocolates for all the commissions generated by her strategy.  And good luck developing one yourself that doesn't have high trading costs or tax consequences!

My mom does everything through her own firm.  But I would appreciate it if everyone could leave my mother out of the conversation.  That is easily a sore subject for everyone.  I included a very rudimentary explanation of what she told me many years ago.  Thank you.

Fair enough.  Apologies for using your mother as an example.  Only trying to make the point that anyone who employs a "strategy" that involves frequent trading is only going to enrich the broker at his/her own expense.


Quote
To me, I'm not looking to time the market.  All of my research shows that it's a losing strategy for the average investor.  It is a long-term strategy.  But I can see how it comes off as day-trading or market timing, my explanation doesn't really clarify that.
I really mean no offense personally when I say: It really doesn't matter what you *think* your strategy is all about. And it doesn't matter if you *think* you are above average.  If you are implementing a system where you try to determine some absolute or relative price, at which to enter or exit the market, you are market timing.  Doing it with individual stocks is even sillier than using a broad index. 

I used to work with a guy who would come in Monday talking about his excursion to the casino to play blackjack and poker.  He was always talking about which strategy he had employed and which he would try next week.  He may have losing days, but he *insisted* that over the long term he came out ahead.  When someone told him he was gambling he corrected them and told them about his strategy.  It's just funny to hear the similarities.


Quote
SunshineGirl:  Thank you, you have understood that this is my spare fund strategy.  Like you, I get invigorated from watching the individual stocks make massive moves within a given day.

And...... there you have it.  I don't judge when it comes to throwing money at hobbies.  Some hobbies are anti-mustachian, but I'm not going to bash someone for buying a boat, or a plane, or tricking out a vehicle with rims and speakers.... or whatever makes them happy.  And if you want to watch individual stock prices shoot around because you'd rather get a rush that way instead of hang gliding, or whatever.... go for it.  But when you ask for advice (or entertain a discussion) on how to make money doing it.... that's a different story.

Why is it so important to declare that is your "spare fund"?  Unless this really is a hobby and not a way to build wealth?  If this is a hobby that will cost money it's important that it be done with money that leaves you comfortable if it all goes away, right?  But if this strategy is really going to build your wealth, why are you playing only with spare funds?

Reward and risk are correlated, there's no way around it.  And, in the long run, if you demand to be invigorated by your investments, then you will pay for that luxury.  It won't come free and it certainly won't pay you dividends.  You are choosing to pay for risk, it's as simple as that.



tyler1215

  • 5 O'Clock Shadow
  • *
  • Posts: 39
Re: Exit Strategy
« Reply #17 on: September 11, 2014, 03:18:45 PM »

You've chosen an odd forum to ask for advice on market timing. :)

I think I overheard two old women discussing this same investment strategy just the other day!! They were walking from the nickel slots to the penny slots. :)

But here's some real advice on locking in gains. 
Invest in index funds across diversified set of asset classes.

If, after one year, you have an opportunity to realize some LTCG, try to do so in a tax year when you are in the 15% bracket so you can realize the gain and pay 0% in federal tax.  Rebuy the same index funds as soon as the fund and/or firm will allow.

P.S. I hope your mother's broker/firm sends her a box of chocolates for all the commissions generated by her strategy.  And good luck developing one yourself that doesn't have high trading costs or tax consequences!

My mom does everything through her own firm.  But I would appreciate it if everyone could leave my mother out of the conversation.  That is easily a sore subject for everyone.  I included a very rudimentary explanation of what she told me many years ago.  Thank you.

Fair enough.  Apologies for using your mother as an example.  Only trying to make the point that anyone who employs a "strategy" that involves frequent trading is only going to enrich the broker at his/her own expense.


Quote
To me, I'm not looking to time the market.  All of my research shows that it's a losing strategy for the average investor.  It is a long-term strategy.  But I can see how it comes off as day-trading or market timing, my explanation doesn't really clarify that.
I really mean no offense personally when I say: It really doesn't matter what you *think* your strategy is all about. And it doesn't matter if you *think* you are above average.  If you are implementing a system where you try to determine some absolute or relative price, at which to enter or exit the market, you are market timing.  Doing it with individual stocks is even sillier than using a broad index. 

I used to work with a guy who would come in Monday talking about his excursion to the casino to play blackjack and poker.  He was always talking about which strategy he had employed and which he would try next week.  He may have losing days, but he *insisted* that over the long term he came out ahead.  When someone told him he was gambling he corrected them and told them about his strategy.  It's just funny to hear the similarities.


Quote
SunshineGirl:  Thank you, you have understood that this is my spare fund strategy.  Like you, I get invigorated from watching the individual stocks make massive moves within a given day.

And...... there you have it.  I don't judge when it comes to throwing money at hobbies.  Some hobbies are anti-mustachian, but I'm not going to bash someone for buying a boat, or a plane, or tricking out a vehicle with rims and speakers.... or whatever makes them happy.  And if you want to watch individual stock prices shoot around because you'd rather get a rush that way instead of hang gliding, or whatever.... go for it.  But when you ask for advice (or entertain a discussion) on how to make money doing it.... that's a different story.

Why is it so important to declare that is your "spare fund"?  Unless this really is a hobby and not a way to build wealth?  If this is a hobby that will cost money it's important that it be done with money that leaves you comfortable if it all goes away, right?  But if this strategy is really going to build your wealth, why are you playing only with spare funds?

Reward and risk are correlated, there's no way around it.  And, in the long run, if you demand to be invigorated by your investments, then you will pay for that luxury.  It won't come free and it certainly won't pay you dividends.  You are choosing to pay for risk, it's as simple as that.

An apology was not necessarily needed, I just didn't want the discussion to take a nasty turn.

Your opinion has been noted but please comment only on the topic regarding exit strategies.  Thank you.

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Exit Strategy
« Reply #18 on: September 11, 2014, 05:20:56 PM »
My strategy is concentrated on the long-term, but reflecting on the strategy made me think "how do I make money off of my investments?"  Buying stocks or index funds is the easy part, but I had not really seen discussion on exit strategies.  I was at a lost for the scenario of someone has bought funds and stocks and built a portfolio worth a million dollars, but how do they get to that million dollars?  If I sell stocks to lock in gains, do I purchase index funds as a safer bet against volatility or place it savings accounts for buying investment properties, CDs, or just live off of the money?  Those last questions can be ignored to keep from going down a rabbit trail from the main topic.  It is easy to find investing strategies and advice on how to build a stache on this forum, but I have yet to see how people get to the stache for retiring.  Perhaps that was my real question with this post.

Essentially, you don't get to that $1MM.  You get to $40K every year, which would be a 4% withdrawal rate.  (feel free to insert your own %, the mechanics would be the same)  At a pre-determined calendar date, sell $40K worth of your portfolio.  You'll choose how to do this based on your desired Asset Allocation and selling to fund your living expenses will serve to re-balance your portfolio.  If it's more than $40K out of whack, re-balance by selling/buying the proper funds at this time as well.  Your remaining stash will stay invested in your original investments.  The $40k sold will then be used to pay your living expenses for the next year.


KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: Exit Strategy
« Reply #19 on: September 11, 2014, 08:37:47 PM »
Are you a fundamental trader? Buy when the stock has attractive fundamentals, sell when they're unattractive.

Are you a momentum trader? Buy when the momentum is in your favor, sell when the momentum turns.

Are you a "story" trader? Buy when there's a compelling investment thesis, sell when it looks like it's not going to pan out.

Are you a contrarian trader? Buy when consensus is deeply negative, sell when it is neutral.

Are you a passive index investor? Then you just keep on buying.

This is all facile advice, but ultimately it's sort of a facile question. There's no "right" answer.

You're basically asking, how do I trade so that I systematically beat the market? If you think someone on some message board has the answer and is going to give it to you, well, I'm afraid you're going to be sorely disappointed. You're probably better off trying to solicit winning lottery numbers.

Also, if you're researching companies for 35 hours a week on average, you should be doing this for a living. That would allow you to quit your full time job and get paid to do your hobby. Seems like a no-brainer.

TomTX

  • Magnum Stache
  • ******
  • Posts: 3715
  • Location: Texas
Re: Exit Strategy
« Reply #20 on: September 11, 2014, 08:56:51 PM »
I am asking for some advice with an exit strategy for investing in stocks and ETFs. 
I have a loss strategy but not a gain strategy.

My loss strategy is to DCA until the shares have lost 50% of its initial value
when I first bought it. Then it's a hold until it regains back to its initial
value or never sell, but don't buy back in unless analyst project a 12-month
return to its the initial buy price.

I'm unsure of when to sell shares that are going up in value.

My mother has a strategy that she will buy and hold, never selling a loss, until
the share has gained 10 points. Then she will sell and walk away, never thinking
that she should have waited to sell for a larger gain.

I am proposing to DCA until the share has doubled in initial purchase price.
Then sell 50% of my holdings to lock in the gains and go back to DCA.

I would like to hear some thoughts to my proposal, others' strategy, and even
some comments such "you're in over your head. Do more research, start here..."

Thank you in advance, I appreciate the input.

Sure. Easy strategy. When you're up 10% in an individual stock, sell it and buy VTSMX, or the equivalent ETF. Apply this part of the strategy (buy VTSMX) when you sell the loser stocks as well.

Don't sell the VTSMX until you reach FI/RE

When you have reached FI, you sell 3-4%* of the VTSMX for your first year's living expenses. Increase that dollar amount by 3% and sell that much the next year for living expenses. Repeat forever.

*Minus dividends, as you don't need to sell the VTSMX to spend the dividends. 3-4% as a baseline is depending on your own risk tolerance.
« Last Edit: September 12, 2014, 05:28:40 AM by TomTX »

waltworks

  • Magnum Stache
  • ******
  • Posts: 3390
Re: Exit Strategy
« Reply #21 on: September 11, 2014, 09:07:06 PM »
Presumably you are good at something. Teaching people to play the piano. Designing custom skis. Eating the most hotdogs. Whatever.

Do that thing for a decent amount of time each day. You will make amazing profits. Don't spend those profits on stupid things - instead, take them and invest them by buying index funds that reflect the whole market and require no attention or skill on your part.

Alternately, if what you love is trading stocks, go get a job at a brokerage and do it for a salary. The whole idea that you're going to beat the market is dumb in the first place, but that you'll beat the market as an amateur in your spare time is just hilarious.

-W

johnhenry

  • Bristles
  • ***
  • Posts: 304
  • Age: 39
  • Location: Midwest
Re: Exit Strategy
« Reply #22 on: September 12, 2014, 09:37:50 AM »
Presumably you are good at something. Teaching people to play the piano. Designing custom skis. Eating the most hotdogs. Whatever.

Do that thing for a decent amount of time each day. You will make amazing profits. Don't spend those profits on stupid things - instead, take them and invest them by buying index funds that reflect the whole market and require no attention or skill on your part.

Alternately, if what you love is trading stocks, go get a job at a brokerage and do it for a salary. The whole idea that you're going to beat the market is dumb in the first place, but that you'll beat the market as an amateur in your spare time is just hilarious.

-W

Good advice.  If trading stocks is what you love and it gives you a thrill, get a job doing it so you can play with other people's money!!

devan 11

  • 5 O'Clock Shadow
  • *
  • Posts: 54
  • Location: Iowa, USA
Re: Exit Strategy
« Reply #23 on: September 13, 2014, 08:24:05 AM »
  I buy funds rather than stocks, but one rule for me is to minimize taxes.  I try to ensure that each trade will be greater than 1 year for taxable accounts to be long term capital gains.  My foreign money goes here too.  I can write off foreign taxes.  Otherwise, I get taxed twice for the same profits.  Most of my re balancing is by new money going in, thus don't trigger excess trader fees.  I have arbitrarily picked 18 months as a time to check on re balancing to let profits have time to grow.
  These rules are to control systemic drags on profits by controlling costs.