Ask Mike:
If selling a little is a good idea, why not just sell it all?

Question:

Hello Mike,

Can you tell me more about your reasons for selling 25% of the BTJ position this week?

Doesn't this decision fly in the face of establishing an investment model and sticking with it?

Once BTJ gave a strong buy signal and the purchase decision was made, why exit the trend early? Conversely, if quick profits accrue, why not exit the entire position and put the money to work elsewhere as you do with some options?

Best regards,

Patrick M from Madison, WI

Mike's Response:

Hi Patrick,

Good question. Here are my reasons:

1. It is never wrong to take a profit.
2. The market is still concerning me that it could go lower... much lower. We were up 25% in less than 3 weeks and I did not want to place that much gain at a significant risk if we were to encounter a major sell-off in the market. So, I wanted to bank some of those profits. That was a good decision, since we were able to sell at $35 per share, and now it is trading at $34.29. But, even if that hadn't happened... even if the stock had continued to move higher in price, the prudent thing to do would be to convert some of those paper profits into real money and put those profits in the bank.
3. As you know, since there are a maximum of 20 positions in this portfolio, my goal is to have no more than 5% invested into each holding. Normally, I wouldn't let these profits bother me until we had a 50% gain, but my concern for capital preservation is very high right now. It would be a shame to get all that profit built up and then watch it go away if the market tanks.

There is merit in your thinking about closing out the whole position. But, my stock strategy is to follow my rules for exits. In this case, the decision to sell 25% came from my Asset Allocation rule, but was governed by the over all market.

Our goal is to generate 'consistent profits'. Consistency comes from a methodical, steady, process whereby we follow our rules in a consistent manner... not just blindly... but, certainly with a disciplined approach to staying the course. If we didn't believe in an equal asset allocation rule, then we should remove that rule. If we do believe in it, we should follow it.

Thanks for writing, Patrick.

Regards,

Mike