Exit Plan


coco-chanelBetween drags from her cigarette and stabbing fit models with straight pins, Coco Chanel said, “Elegance is refusal.” Meaning, if you want to be truly chic, before you leave the house, remove anything superfluous. Choose one: silly boater hat with black grosgrain ribbon, multi-strand of pearls, gold long chain of precious stones, ruby earrings, or jangly charm bracelets. Or, if you are Coco Chanel, you do whatever the hell you want.

Still, the woman had a point— and it applies equally to finance as it does to fashion. Letting something go, whether it’s a ring whose style you’ve outgrown but has sentimental value or a stock that has been a workhorse for years, is hard. Hanging on to the former crimps your style, while clinging to the latter can be like taking a wrecking ball to your net worth.

Investors make all kinds of irrational excuses as to why it’s not a good time to sell. If the stock has dropped, we’re reluctant to book a loss, so we tell ourselves we’ll hang on until we hit break-even. This “strategy” comes with some heavy opportunity costs. What if something fundamental is affecting the share price? What if it never bounces back?

The opposite scenario can be even harder to deal with. The stock price is on steroids. Something good happened, or enough somebodies think something good will happen. You’re rolling in the green! But, “Oh, no!” if you sell now and the price keeps rising, you’ll have missed out. Greed has sent many otherwise sane investors down the rabbit hole.

I’ve fallen into this trap more times than I care to admit. The first time was in the ’90s with Silicon Graphics. I had a paper profit. Life was good. Then some hotshot who ran a big US investment fund announced that there was only one stock he loved and it was, you guessed it, Silicon Graphics.

“What a boon,” I thought. This one is going to go through the roof. I passed the time making mental lists of the all beautiful things I would buy with my “winnings”. Funny thing happened. The guy must have been dumping every last share of Silicon Graphics just as his sage advice was going to press. The stock sank, then sank some more. Like a girl whose beau was lost at sea, I kept a vigil for the stock’s safe return but I can’t recall that it ever happened. (Like many investors I have a selective memory when it comes to losses.)

As investors, it’s good to remind ourselves that job #1 is to make a profit. Sometimes that means leaving money on the table.

Unless you have psychic powers it’s impossible to time the market and find the perfect exit price. But just as Chanel counseled, you must be disciplined. Before you take a position, plan your exit strategy. Twenty-percent or a triple-bagger? Once you hit it, get the hell out of Dodge.

Like the little black dress or the string of pearls, there are always some keepers. But blindly following a buy-and-hold strategy is sub-optimal because markets are dynamic and sector dominance fluctuates.

In an attempt to be a better investor, I recently sold Imperial Oil. I had had it for decades and it had done well. Due to weak oil prices, I felt it was time to take profits and move to greener pastures. Who knows, I may pick it up again later, but it felt good to take the profit.

Now the big question is, would Chanel approve?

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