You’ve got to know when to hold ‘em
Know when to fold ‘em
Know when to walk away
And know when to run
Who knew that Kenny Rogers gave such great investing advice? When most people think about investing, they focus on the buy side. The common thought is to buy low and then wait for the investment to increase in value. Yet, most people never think about actually selling that investment. Knowing when to walk away is what separates the good investors from the great ones.
We like to think we are rationale, but when it comes to money, especially investing, it seems like that part of our brains shut off. I’ve been guilty of this myself with a recent investment.
My Irrational Trade
A few months ago, I thought UnderArmour would be a good investment. They had increasing sales each year, plus I LOVE their products (well maybe everything but those Curry 2s). I decided instead of buying shares of stock I would sell a put to collect some premium and lower my overall per share price when I did decide to buy. With the stock around $40, I decided to sell a $37.50 put. Everything was going well for a while, then sales slowed and the stock fell.
If I were thinking rationally, I would have bought my put back at a small loss and moved on. With slowing sales, my investment thesis was falling apart. UnderAmour is a high Price to Earnings (P/E) stock. Without a high sales and earning growth rate the stock will drop fast. I should have seen that but all I thought was, This is UnderArmour, I love their stuff. Surely this is a temporary drop in price. So instead of closing out my put, I rolled it to a later month thinking the price would rebound, plus I was able to get some additional premium.
From Bad to Worse
Well, the price never did come back, in fact UnderAmour posted some terrible earnings that were worse than expectations and the stock cratered to the low $20s, high teens. Now my small loss had ballooned to over $1,000. Finally, I decided that it was time to run and closed out my position. Luckily, I limit my positions so a single loss won’t destroy my portfolio. Just another example of the benefit of being diversified and not putting all your eggs in one basket.
It’s situations like this that cause most people to say that Wall Street is fixed against the everyday person, yet this loss is my own fault. I forgot to heed the words of the investing savant Kenny Rogers and let my emotions cloud my judgement. I could have gotten out with a loss of a few hundred dollars. Instead my brain turned into Dory and told me to just keep swimming until we get that money back.
As an investor, knowing when to sell is what I struggle with the most and it’s not just when the price drops. After a stock has increased in value, I may think about selling but then my brain comes back with But I’m up, maybe I’ll be up more and if I sell now I’ll miss it.
Maybe it does go up some more, but no stock goes up forever. At some point this logic runs out, but when is the right time to sell?
Set Your Limits When You Enter the Trade
I suggest setting a selling price, both if the investment goes up or down, when you buy. I’m trying to do this more now and it has helped remove some of the more irrational thoughts from my trades. Having a game plan when you enter a position is key since you’re usually thinking clearer at that point. You had a reason to buy and an idea of what type of return you want, so set then exit point prior to investing. I’ve started writing down my desired selling price (a realistic price, I’m not assuming everything is going to double or triple in value) and when the stock price reaches that I know it’s time to sell. I usually tier my prices, so I don’t sell all at once. This way I can lock in gains and still have some shares left if the price would continue to rise.
I set a similar price on the downside. I am a bit more flexible with this price since sometimes the overall market can bring down the price of all stocks for a brief period and selling at that point would not be a good idea. But if my reason for buying changes and the price drops then I know it’s time to get out.
Learn from Your Mistakes
We all make mistakes, but the key is to learn and improve from them. Investing successfully is difficult and overcoming our drive to not lose money can sometimes be even harder. Yet being diversified and setting out the ground rules before we make an investment allows us to step back and think rationally at each step of the process.
When was a time you stayed in an investment too long and what did you learn from the experience?