When to Exit?

A lot of analysts, investors, traders, and ordinary people like me sometimes spend more time focusing on when to enter into a position, but not on when to exit. So far my first lot of stocks from my test of Mr.Greenblatt’s system is doing ok, although it is still very early. The system calls for the investor to exit their winning positions exactly 1 year after purchase to minimize the capital gains tax impact (to 15%), and to exit losing positions 1 day before the year’s end to maximize capital gains losses. Now my question to you, especially the investors who focus more on fundamental analysis, is when to exit a position if it suddenly reaches your target valuation in a very short time period. You are put into a position where your investment has done very well, but almost too fast. The value is suddenly wiped out.

You could stick with it for the long haul if you believe the company has more tricks up its sleeve to push their competitive advantages further, or you can lock in those gains, eat the capital gains hit, forget about it, and look for the next investment proposition. It’s also interesting to note that this goes against the strategy of John C. Bogle, another famous investor and founder of Vanguard. Transaction costs hurt, but it is extremely tough to resist the temptation to lock in gains and look for the next big story. Just forward thinking here, and would love to hear some of your feedback.

There have been many times when I wished I had held on, and other times when I wish I had exited. Exiting is half the battle. I wish it was a science.

Of course some technical analysts will treat this as a science, and will tell me when the perfect exit point is. I’m open to all opinions. I know nothing about technical analysis (yet), but would love to hear from them as well.

(side note: It looks like I messed up my last analysis on DST Systems, Inc. CNTRL-C, CNTRL-V doesn’t work after watching a good football game. I apologize for that. I was up late watching Manning throw Tyree the one handed helmet catch. What a game. The dog ate my analysis homework :) Actually, it’s on my home laptop, I’ll post it later when I get back home.)