“No one has ever gone broke taking profits.” That is a popular saying in the circles I have been known to traffic in. It makes sense doesn’t it? If you take winners off the table when you have a profit, you will always have more money than you did when you started. But there is another uglier side to this coin that few do a good job of covering.
I was on the beach with the family last week when the Research in Motion (RIMM) release came out and my associate called me to let me know that it was up big post-market. In speaking with a family member that is in a similar business, we were lamenting the fact that neither of us had adequate exposure to this name. Our fund has a small position because my associate was wise enough to get us on board, and I was cautious enough to keep the size small enough to ensure we didn’t make any serious money on it.
My family member (we’ll call him Fred), confessed that he covered his position in his IRA last year as he had already realized a 50% gain in the stock and thought the run was likely over. It reminded me of another more relevant adage that one should “let your winners run, and cut your losses quickly.” Its so easy to take a quick profit when it is available and go looking for another great pick while many of us are so stubborn that we stick with positions that do not show an immediate profit because we’re confident in our analysis and expect that position to eventually conform to our expectations.
Now this post is not supposed to be a ringing endorsement of RIMM encouraging everyone to go pick up the stock. It is extended here and is really a dangerous place to be initiating a position. However, if I held a position in RIMM (wait! I do! – its just small), I wouldn’t be too quick to cover. The company is apparently starting to move into the vibrant Chinese economy, is introducing new products, and is likely to be a formidable competitor to Apple and the new I-phone that is getting so much press.
I guess the point that I am trying to make to those less seasoned investors is that in developing a strategy to successfully traverse these markets, one must be disciplined to stick with names that are conforming to your expectations because if you have done the work and taken the risk, you should stick around to be paid the best possible price for your efforts. Conversely, if a stock isn’t behaving as you expected, there must be a pre-determined point at which you are going to ruthlessly cut it so as not to give up your profits from winners on picks that don’t turn out.
For me, this means holding on to my long positions in Chipotle, Intercontinental, and FC Stone, as well as shorts in Resmed, Moody’s and Las Vegas Sands until they give me a definite reason to close them out. Conversely, I need to be willing to close positions such as Under Armour and Carmax that are simply working against me. On my desk I have two words displayed over my computer monitors. they are “DISCIPLINE” and “FOCUS.” I believe these are a traders two best friends and are necessary for success in this business.
Have a great Friday and enjoy the weekend!
FD: Author has a long position in RIMM
Additional Reading:
WSJ notes competition’s phone Can Save Lives!
Research in Motion (RIMM)
July 8th, 2007 at 5:20 pm
this is an incredible company.
i first bought it in november 2003 for about $44 presplit or about $22 in todays. and you know what.? It was the day before christmas 2003 and RIMM reported earnings. the stock shot up $25, >50% all in one day and has never looked back 1000% later! with the market cap nearing $50 Billion, i would say this advance is due to slow down. Apple, Qualcomm, Microsoft, Nokia, Motorola are closing in with advanced and advancing features. The brightest analyst that got the RIMM Long side call correct back then 2003, Merril Lynch, maby Mr. M Mullivich (misspelled). boris b.
July 9th, 2007 at 3:11 am
this being the closest thing to the “tech spot” got any thoughts on Broadcom-brcm? it has come down about $8-$9 to the 29s and a $1-ish bounce. they are saying tech is bottoming and so Broadcom might have in-line or better industry bounce potential? TXN reports FQ2 numbers on monday. boris
July 9th, 2007 at 1:22 pm
Zack, Are you long or short Moody’s? MCO
July 9th, 2007 at 7:08 pm
MCO – when i wrote the article I finished by saying I was concerned with the prospects. I thought the risks of owning the stock outweighed the reward. I didn’t have a position but since then I have set up a short position in the name and have a marginal profit so far.
I don’t follow BRCM very closely so I don’t really have an opinion at this time.
Borris… Good trade. Nice discipline to stay involved because it’s looked extended many times on the way up.
July 10th, 2007 at 4:34 am
I’m also short MCO. Not sure when to cover thought. How far can it really drop?
September 30th, 2007 at 6:17 am
Hi Zack :
RIMM do have a nice run even after its 3 for 1 stock split recently in August 2007.
This week ie. 4 Oct 2007 is RIMM 2nd quarter earnings and the stock could fluctuate after that.
Take care.
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