What’s Your Exit Strategy?
Ron DeLegge, Editor
November 13, 2009
SAN DIEGO (ETFguide.com) – Ever since Warren Buffett declared that his favorite holding period is “forever,” an entire generation of investors have never considered the idea of selling. You might call them “buy-and-forget” investors.
While it’s generally true that business owners are the ones who make the big money over time, not the traders of businesses, even owners need to know when it’s time to get out. How many billions, maybe trillions have evaporated into thin air because people didn’t have a good exit strategy?
A Billionaire’s Lesson
Mark Cuban had an exit strategy. At the height of the Internet boom (NYSEArca: FDN) in 1999 he sold Broadcast.com for $5.9 billion to Yahoo. At the time, naysayers thought Cuban was crazy. He could’ve gotten $10 billion for the company if he was just a little more patient.
Today, Cuban is a billionaire and naysayers are still holding out hope that higher prices will show up. Cuban was smart enough to see a frothy market and to capitalize by cashing in. What about you? Do you have enough sense to realize when it’s time to get out?
Beware of the Future
Much of Wall Street’s investment advice and analysis has a bias towards positive outcomes in the future. Why is the future almost always better than the past? Because it has to be! Unfortunately, the future does not always turn out to be as rosy as projected.
Even though it’s easy to forget, look at history.
From 1997 to 2000 the Nasdaq Composite (NasdaqGM: ONEQ) raced from 1,250 to 5,000. Wall Street analysts like Henry Blodget, Jack Grubman and Mary Meeker were the face of the technology bull market. If one of them said that Amazon.com had a price target of $250, someone else had an even more fantastic forecast. Some of these analysts spent more time doing interviews on CNBC than analyzing financial statements. Deceived investors that didn’t have an exit plan were led right over the cliff when the tech boom ended.
Today the Nasdaq trades in the vicinity of 2,150 - or less than half its former glory. Those without a good exit strategy often pay a severe penalty for their erroneous thinking. If you were one of them in the past, don’t be one of them in the future.
What about Today?
On October 9, 2007, the Dow Jones Industrial Average (NYSEArca: DIA) closed at the record level of 14,164.53. Many investors kept buying into the rally with the idea that it wasn’t yet time to get out. Two years later, the Dow is trading at levels almost 30% lower than 2007 highs. Bad as the Dow’s performance may seem, many investors have sustained substantially worse damage than the market. What went wrong? Why are they still in a hole? How much financial pain could’ve been saved if they had an exit strategy?
Eight months after hitting depressed levels, major stock indexes have zoomed ahead by around 65%. Is that normal? How many other times in the history of financial markets has it happened? The answer to the question of “How Far Can this Rally Go?” is there for the taking. Isn’t it about time you find out?
Economists have already proclaimed the worst recession of our generation has ended. Investors are confident this time Wall Street’s pundits will be right, even though most of the time they’ve been wrong. Even Bill Gates and Warren Buffett say the worst is behind us. Politicians are saying the same thing. Never mind rising unemployment, zero percent yields and the depressed U.S. dollar.
Stocks are up 65% since March and they want you to buy more. Before too long, stocks will be up 100% and you’ll wish you would’ve got in. Why it’s an almost identical replica of the behavioral pattern of previous generations, broke ones.
What’s your exit strategy?