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Divot's Market Debrief

Lost opportunity cost, or: What’s wrong with buy and hold?

Rating: 2 votes, 5.00 average.
I received an interesting piece of mail this week. If you invest/trade the markets long enough, you’ll get these sort of mailings fairly regularly.

It was an invitation to participate in a class action lawsuit over something Apple did between 2001 and 2005. I don’t really know or care what they were sued over, but Apple settled – and the cash is now available to be claimed. Essentially, if you bought shares of Apple during that time you might be entitled to some portion of a settlement. I did a search of my trading records, and sure enough – there it was. I’d bought AAPL on 11 Oct 2005 and sold on 18 Oct 2005: a quick 4% gain. However, as I reviewed more of the legal mumbo-jumbo, it became clear that my take on the lawsuit settlement would amount to $0.07 (estimated) per share. Bottom line – not worth my time to even fill out the class action paperwork. The 4% I made on the trade four years ago far exceeded any reimbursement that I would receive from this settlement.

The interesting thing was realizing that the price I paid for AAPL at that time was $50.59 per share. Wow, wouldn’t it be nice to have kept those shares? My unrealized gain today would be 646%! That’s not really” g0-crazy-retire-to-Fiji money”, but it’s well over 100% gain annualized… Why did I sell at that time? Probably a stop, could have been an itchy trigger finger with a desire to book gains – really I don’t remember. When I look at the chart from 2005, it’s really a facepalm moment.

This has been an introspective moment over the weekend, as it’s caused me to question some of my approach to trading the markets. I assess that I do well above average at picking what to buy, and I’m usually pretty good on when to buy also – but my timing on when to sell has had some sucktastic moments. I’ve experimented with putting trailing stops on everything – only to be whipsawed out of stocks that continued up-up-and-away. I’ve bought uptrending stocks that then paused and/or retraced just after I buy – so I sold (locking in a loss) only to find them explode upward the next week. I’m starting to think that I need to slow down my timeline a little; step back from every wiggle of the chart and let my trading positions work for me.

I’ve believed for a long time that “buy and hold” is a steaming load of crap. There are a plethora of market indicators that clearly show market trend, and it’s foolish to go long in a bear market or short in a bull market. My favorite indicators for trend are the market breadth and bullish percents (which as of this writing still show a bull market). These work well and consistently. My issue seems to be finding my rhythm for when to take profits or cut losses, and I’m open to ideas on how to improve my game. I don’t care to hear the Warren Buffet answer (who has said his time horizon is to never sell), but I feel there’s gotta be a better system for when to sell.

By the way – going back to the question of buy and hold AAPL from Oct 2005 – I don’t think that would have been a good idea at all. There were a couple of clearly defined downtrends the first half of 2006 and most of 2008. I think any reasonable trader wouldn’t sit on his hands through that bleeding. Certainly I couldn’t have, considering the market breadth and bullish percents clearly showed defensive situations during that timeframe. What do you think?

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  1. alevin's Avatar
    I think I just added a new word to vocabulary--sucktastic! I resemble that remark with a couple of my sells last year, doing better this year so far.
  2. Birchtree's Avatar
    I usually only like to sell on a sacrifice when I need to raise cash to buy something that has become way undervalued. As an example - selling commodity stocks at their peaks to buy financials on their lows. I did this in 2008 and have no regrets. I like to keep my base intact to continue the dividend income for reinvestment. As a margin player I can usually earn buying power without unnecessarily realizing capital gains.
  3. chemmie's Avatar
    One thing I would advise: if you have a nice gain, sell enough to get your cost back out and keep the rest. Basically, let your profit ride.

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