Sunday, July 08, 2007

What do you think are some common mistakes investors make while taking an ‘exit’ or ‘sell’ decision?

Here is an interesting interview with Dr. Marc Faber. ‘The most common mistake is to buy what is popular and in the limelight’

  • What makes an ideal exit strategy while taking an investment decision? When is the right time to move out of an investment? Are there any guidelines or pointers here?

    I have to confess that it was always easier for me to find distressed assets and buy them than to find a perfect exit strategy. This has also made short selling difficult for me. However, let us consider the Indian stock market.
    After 1994, it declined in USD terms by 70% and was very depressed in 2002/2003 when the Sensex hovered around 3,000. Moreover, it had built a long base.

    Now the index is approaching 15,000, up almost five times. Some people say it will go to 30,000. That may be the case -- although not in my view. However, even if it increases to 30,000 we are talking about another 100% and not 500%. In addition, given that there are some symptoms of a bubble I do not think that the rewards offset the risks sufficiently. Therefore, I would rather be a seller than a buyer although I may miss on some opportunity. For me, to get in early and get out early has been the best strategy.

    Even expert fund managers seem to be saddled with paper they should have moved out of. What do you think are some common mistakes investors make while taking an ‘exit’ or ‘sell’ decision?

    The most common mistake is to buy what is popular and in the limelight. The second most popular mistake is to buy when the fundamentals look good. Horrible fundamentals and hopeless outlook should be bought and strong fundamentals and cloudless skies should be sold.

    I would like to add that most fund managers are hopeless anyway since they fail to out-perform the indices.

    How would ‘exit’ or ‘sell’ decisions vary across asset classes?

    I would just watch television. When something becomes a buzzword such as “New Economy” in 1999/2000 and now “Private Equity”, LBOs sell these sectors. Since everything is now in fashion including art, wines, antique violins, stamps, stocks, real estate, commodities, water, infrastructure, totally useless collectibles, etc I think most assets are due for a big setback.

    Is there any advice you would like to give to investors while taking an exit decision on investments?

    It is better to sell too early than hold on to collapsing assets such as NASDAQ post 2000. If there is value in buying distressed assets, there must be value in selling expensive assets. Moreover, in the very long run, nothing has ever appreciated at a faster rate than global nominal GDP. Investors tend to have vastly inflated expectations about the performance of the assets they own.


newbie said...

Dear Moola,

I have a friend, he was asking about my second opinion on few stocks which are FOREMOST, HARVEST and MUH, after i look at the income statement and history, i told him, these stocks are not looking good fundametally, these were happened few months ago which he bought into these stocks in around 10 -15 cents. As at up to date, these stocks had risen especially FORMOST rised to 30 cents already, making more than 200% profit, he is now proudly told me that i am stupid and he is wise, and i replied him with "congrates". I said "congrates" is because i felt he is the winner in a GAMBLE. I would like to ask Moola, how do you judge this? Is this called an investment? If you are me, what would you say or advise to my friend?

Thanks Moola.

Moolah said...


I do believe that I am not here to lay judgement on anyone and neither am I here to give full fledged advises.

All I can say is that for any given instance(s), anyone do stand a chance to be a winner.

What matters most, when it does matter, is one still a winner?


newbie said...

Topic : Why You Should Beat Wall Street

For decades, it's been known that most mutual funds underperform passive index funds. To me, that seems counterintuitive. How can a completely brain-dead strategy like buying every stock in the S&P 500 -- or an exchange-traded fund like SPDRs (AMEX: SPY) -- outperform legions of the smartest people on Wall Street?

If you answered, "Because Wall Street is secretly controlled by an evil cabal of demonic gnomes from the seventh dimension," then you may enjoy some of the discussions on our board.

But there are other plausible explanations. In 1965, Warren Buffett himself theorized that conformity, in many different forms, was responsible.

Buffett's explanation
On Wall Street, you can make mistakes, as long as they're the same mistakes that everyone else is making. Buffett noted that there's little personal gain from taking a stand on a novel idea, and lots to lose if that idea is a bust. The safest place is standing in the middle of a crowd.

So, most portfolio managers conform to the consensus on the right money management practices, the right degree of diversification, and the right stocks to buy. The judgment of the group replaces the judgment of the individual. Instead of finding the best investments, Wall Street buys the stocks that everyone agrees aren't terrible. And there's little motivation for any individual to break this cycle of mediocrity.

Buffett does note that investment advisors are still providing an important service by promoting a long-term outlook and preventing clients from making truly disastrous investment decisions. But if you're looking for outperformance, don't look to Wall Street.

Back to the future
Aside from Wall Street having a long-term outlook, Buffett's impressions are still valid today. The suited legions still haven't figured out that what Buffett learned long ago: Avoid the most popular stocks, because they'll be priced to perfection.

Cisco Systems (Nasdaq: CSCO), (Nasdaq: AMZN), and eBay (Nasdaq: EBAY) are the best of the late-1990s Internet companies. Each one has become completely dominant in its niche. Yet two of these companies are below their prices of seven years ago, while the other one shows only mediocre returns. It's really hard to make money buying the expensive stocks that everyone wants to own.

Buffett, on the other hand, purchased American Express (NYSE: AXP) during the salad-oil scandal and Coca-Cola (NYSE: KO) a few years after the "New Coke" fiasco. These were great businesses, but truly hated stocks. Yet they turned out to be some of the most successful investments in the career of a man known for excellent investments.

The Foolish bottom line
Now, as a small investor, you not only can but should beat Wall Street. Why? Just remember:

You have the freedom to pick the best stocks for your portfolio, not just the ones that everyone else is buying.
Your job doesn't depend on conformity, so you can seek out the stocks that nobody else wants -- the stocks that are so hated by everyone that they trade way below their fair value. The same stocks that offer the market's best returns.
So don't be overwhelmed by the stream of news, noise, and information from Wall Street. Nonconformity really can put you ahead of the pros.