stocks - buy & sell upside vs hold

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I like the stop loss order - it keeps you invested and can help keep you from riding the Tsunami all the way to Tokyo. But you are right, it does take some monitoring - though I'm not sure how much burden that is. You could set, and reset, the order weekly or monthly so its not like you'd have to watch it all day, every day.

As far as selling now to capture the gain and the repurchasing - this only works if you're trying to hold a dollar position in the stock; its a waste of time if you're trying to hold a "number of shares" position. For example, if you bought 100 shares at $10 each you've invested $1,000. If they are not worth $1,000 each the total value is now $10,000. So if you sell all of them to lock in the gain THEN repurchase another 100 shares all you're really done is capture the gain and paid the tax - you still have all of the money invested in the same investment (this may sound simplistic for the folks here, but I see this way more often than you'd imagine).

On the other hand, if your intention is to hold a particular dollar position in the stock - say you want to keep $3,000 worth of the stock - you could simply sell of PART of your holding. Doing this captures the gain on the amount sold but limits the tax implications to only that part sold. You stay invested in the item you bought for the amount you bought and you've captured some gain and gotten some cash to invest elsewhere.

Gene E. Utterback, EA, RFC, ABA

This is a really good question that goes to the heart of the difficulty with buying individual stocks. For most investors, stock-picking implies turnover - you don't buy an individual stock to hold forever, you buy it because you think it will do better than average between the day you buy it and some unknown date in the future (but not, typically, "for the rest of my life"). Accepting this premise means you will sell every individual stock you buy and replace it - it's just a question of when. Particularly with growth stocks, this seems to be a good assumption as the asset class is littered with fad stocks, technologies with short life spans, unrealistic growth assumptions, hype, etc.

When you buy a stock would be a good time to set expectations for it and a plan for selling. There's no rule of thumb because it depends on your stock-picking approach (momentum investors might sell at small drops; contrarians may instead buy more). It should have a narrative like "I think X's technology is going to be adopted a lot more than is currently assumed, and they'll make a lot more money than is currently estimated, so the stock will perform above-average once people figure that out." Then that either pans out, or doesn't, and you sell. If you don't have a narrative for buying it, a reason you think it'll do better, why are you buying it?

A mistake many people seem to make is revisiting old purchase decisions

- coming up with new reasons to own a stock, or failing to sell when the premise for buying has either come to fruition, or not. I think the stock will hit $50 if things go really well, it hits $55, and then you say "well maybe it's going to $75." This may be motivated by a behavior called the "endowment effect," valuing something you have just because you have it, which is something to watch out for in investing generally. One test of this is to ask: would I buy this stock today at the inflated price? If not...why would you continue to hold it?

Last thought: all-or-nothing decisions are almost always wrong. They're only right in this case if you hit the Perfect Sell Date which is just about impossible. It's an argument in favor of both buying gradually, and selling gradually.

-Tad

I like selling covered calls, but I am long CREE and afraid to do it because it could take off like AAPL did and I wouldn't have the guts to buy it back.

CREE June 42.50 calls are at $1.08 which is great for someone just buying CREE now.

-- Ron

For the newbies: From my study, a well diversified portfolio of stocks or funds held for the long run is more likely to be a winning strategy.

A repurchase at nearly the same price does nothing for your net worth and doesn't "lock in" anything (except taxwise, which is typically a drawback).

I expect you know both the fundamental and technical ways to set up a selling point, so what do you really mean? Without a revisit to clarify, we must guess something like you saw a successful sector and chose a stock that seemed to have the most momentum in that sector...

If so, than the CREE chart just screams to me to sell a while back - momentum was not only lost but turned down. If you waited too late and fundamentals are ok, then it might be reasonable to not sell or even wait for stabilization at a lower level and buy more cheap. ARMH looks to be in the lost-momentum phase where it is hard to say if it will regain momentum.

For me it is hard to assess momentum of individual stocks due to volatility, so maybe that moving average technical witchdoctory will help. But at least for narrow etfs, I check out their momentum vs the sp500 AND their sector, with overlaid graphs showing the percent changes for various periods. Maybe overlay some foreign indices if they apply. Then you can see if it is being affected by sector or nationwide issues and how it performs relative to it, rather than just being an abstract wiggly graph (or worse, a number). You must check various time frames to factor out the arbitrary starting point offset issue.

I hate being a momentum investor, but I learned the hard way that the innocent fundamental-investing bystander gets knocked about by NEGATIVE momentum and must wait an exasperating period for it to correct. By then the fundamentals may have degraded and you never make it back. There is a limited amount of investment money in the world, and people may sell your (good) stock in order to buy a (better) more fashionable one. So you can really lose you by not joining the momentum crowd in not only buying but selling.

Unfortunately markets overshoot up and down, and selling-to-the- greater-fool theory actually works unless you are in the bottom quartile of foolishness. Hard to do it by stop loss orders alone, because you will tend to get nailed by momentary dips or plunges. There are ways to combine if-then-if sell orders and use percentages rather than absolute numbers, but I haven't yet found a way to rig this better than nervous manual ticker watching.

Yet studies show that the innocent fundamental-investing bystander who buys and holds stocks for the long run does better than the typical momentum trader you are describing.

I think waiting for recovery after a correction is only exasperating if one either does not appreciate how re-invested dividends are buying stocks at bargain prices or one is obsessing over the value of one's portfolio in the short run.

Those who worry about the value of their portfolio on a daily basis should not be in stocks.

Then the "typical" momentum traders must be even less competent than the buy and holders. I do realize you want to address and forewarn investment newbies and also people knowledgeable mainly in how to make their high salary rather than safe returns. But I was replying to an OP who seems savvy enough.

Judging from years of posts by the OP, we both have decades of experience with buy and hold of timid mutual funds approximating sp500 and bond indices. And for me, decades of testing out hypothetical trades and watching their results, but not daring to do them in real life (J Bogle would disapprove) until the success rate proved undeniable.

I bet the OP (and certainly I) are still mostly concentrated in holding boring stocks as you describe. I recently added to a large CVY etf position which has triple the dividend yield as SPY sp500, yet matches rather than lags its price chart. This is for money that can't afford to be lost, but isn't likely to do much more than inflation once you factor in some of it being in bond funds.

Now if you also do modest rotation, like between the morningstar boxes of value/balanced/growth for small/medium/large cap based on changes of the business cycles every 18 months... you ignore momentum traders at your peril. Your trade prices will be affected by them, and you can either anticipate this or be a passive victim knocked about. I only took heed because it works.

The big payoff comes from those brief windows of opportunities when risk assets surge, maybe only a couple of years per decade. This is where you make mammoth paper returns as easy as shooting fish in a barrel. The only trick is to preserve at least part of your gains, which is unforgiving work but rewards the most vigilant even when you are an amateur.

The momentum premium itself is not what you shoot for - it is a zero sum game. It just serves as a flag to get in on a genuinely good thing (eg. midcap growth, or emerging markets) and a cushion for getting out. Well, it might be above zero sum if global liquidity is pushing up total p/e ratios. And the approach certainly can work and lead to early retirement vs "buy and hold and never retire".

My SLV etf fell 30% last week; should I have NOT then followed it on an hourly basis to protect my still positive gains? Any high risk position has one week per decade where it pays to watch it like a hawk. After all, it gave huge paper gains for which one only has to lock in about half of it to make it worthwhile. Something I did successfully for cotton and sugar etc after pointing out their historically persistant trajectory on this forum last year. It's not an inconvenience; it's a rare and exciting privilege, especially with ever handier digital monitor tools.

The stocks I find boring are young, speculative ones. They possess too little data for me about how the business is run to say much that is intelligent, generally speaking. The very old companies' stocks are not boring to me. I like reading their fundamentals and how they have done for the long run.

I think setting aside say 5% or so of one's portfolio to see if one can use momentum or other unproven techniques to do better consistently is fine. But I would call this what it is: Gambling. So the person needs to be psychologically prepared to lose all the 5%. Just my opinion.

First, to me it's fine if you view SLV as part of a gambler's game and want to see if you can make a little killing by moving in and out of same. As far as enjoying the game with precious metals, sure why not: Move in and out according to whatever momentum witchdoctory you are testing. ;-)

Second, I am not well read on what role precious metals should play in one's portfolio for the long run. What do Ben Graham, Jeremy Siegel, Bob Shiller and Warren Buffett say about precious metals?

I am fine respectfully agreeing to disagree with your point of view. Folks can read and see the reputable studies generally support my view that short run stock investing is gambling which may be meaningful entertainment to some. I won't put my life's savings on it, though.

I don't gamble, period. In person, people consider me almost pathologically risk averse. Yet I doubled my converted Roth in last 6 months, alluding to my trades on this forum as it happened. I have used consistently successful momentum type approaches for decades such as sector rotation funds and discussed it here over many years. I preserved my investments publicly here in the 2008 crisis using the same principal - liquidate into downward momentum and reinvest with upward momentum. The fantastic benefits of limiting exposure to losses were criticized here as I was doing it because of some trivial extra trade fees vs buy, hold, and bleed. It is essential for me to outperform sp500 and I don't and won't tolerate backsliding or an end to early retirement.

Now look at my original reply to OP which so drove you to intervene here. I didn't advocate momentum trading, I just said the technical and fundamental approach didn't need restating and could only guess he was already doing momentum. Then told how I did it. I have left out some things that helps the success due to lack of interest.

How much money is in your Roth?

What fraction of your net worth are you willing to risk putting into play using your methods?

I tried two posts over the past two days - neither has appeared.

Make that three times. I tried hyphenating possibly objectionable words like "gambl-ing", "ba-nks", and so forth ....

Look at the specififcs of the company.

I tried cleaning up your post, too - I thought it was the URL which contained an obvious bad word.

As you can see, the filters do keep an amazing amount of bad stuff out of here, but I've run into them being very much overly aggressive before, too.

I have been off line for a few days. Tomorrow (Sunday) I will review the post and deal direct with the OP.

Meanwhile, please remember our request to deal with the moderators by email, and not through the newsgroup.

With sincere apologies to dapperdobbs and Bread, copied below is the post by dapperdobbs that was bounced because of the automatic filtering mechanism. My unavoidable absence from watching the newsgroup is at fault, as is an admittedly conservative filtering process. Accordingly I have made major changes in the filtering process to eliminate these problems, and other changes will be made and announced in the near future. Meanwhile, here is a copy of dapperdobbs post that triggered the (old) process.

posted by dapperdobbs

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Keep tabs on the business of the company. (Specifically not being sarcastic: a book on gambling would, I believe, cover the topic of money management, or how much money to leave on the table and when. This is also covered in commodities trading.) Otherwise, in investing, "Security Analysis" (Graham, et. al.) applies. If you were smart enough to find a growth company early, why begin to doubt your smarts when it is ten times what you paid for it? The same analysis still applies, although there may be ten times more to analyze.

The question is a good one - will a company be a CSCO, or a MXIM, or will it be more like MSFT, or is the company an XOM or a MCD? (Or is it a Merrill Lynch, or C, or any number of small companies that had a growth spurt, then went under?) The only way to tell is to watch the business of the company, it's markets, and the economy in general. Another issue is your private income/ expenses and "How much is enough?" If you have large gains that make you uncomfortable, if you're good (or lucky) with charts and crystal balls, you might try any number of tactics to try to lock-in profits, but it's possible to lose money in 'safe' stocks, too. I used to play chess quite a bit, so the phrase "improve your position" is a familiar one. Sell 25% at what you believe is a high point, then buy it back when it has dropped in price enough to cover your taxes paid. That also raises your cost basis. Or look into options (study it carefully and paper trade until you know what you're doing).

The big differences I see are summarized in the phrases "informed estimates" versus "risk management".

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Bread, thanks for the link to the algebra rejected posts site. I do not like to miss George's posts. I would be so much dumber without them.

Skip, oh my goodness, the junk in the rejected posts list astounds. I dunno if I would change anything except opening a line of Usenet credit with George.

tnx all - lots of good info and threads to go back and read.

one concept that I learned about a long time ago was Michael Porter's five forces -

As has been mentioned, the casino analogy is a good for viewing investing strategies. Kenny said it.... know when to fold em, know when to hold em.

I'm an "investor" not a "trader", so I look for companies that will adhere to Porter's five forces, and grow strong.... but sometimes a curveball comes into the picture, and the "barrier to entry" is not as high as thought; like with my Cree stock.... or Rimm vs Android/Apple smartphones or Garmin vs Google smartphone app or ...

Which momentum indicators do you use? Congrats on doubling your converted IRA.

I established a postiion in APOL a number of years ago, and began selling when a) the founders (a huge position) thought about two classes of stock, then reversed themselves, disturbng my confidence, and b) when the chart started looking like Magic Mountain. But I sold too soon - the stock went on to double my average selling price. It has since fallen back 50%. I'm not complaining, but a part of the game is price - perhaps especially buying into large cap value at l-o-w prices (and I think Elle will agree with that). I stick with income and balance sheet statements as primary, but Mr. Market does get excessively 'happy' from time to time. You also seem to favor 'informed decision' as opposed to 'risk management'. (P.S. My apologies for disrupting the thread earlier, it was thoughtless of me.)