Money

& Investing

One Thing We All Know about the Market: It Will Fluctuate.
A Look at Selling Stocks

By Leo Fasciocco

Several years ago, I was at an investment meeting and happened to be seated with the late Louis Rukeyser, who hosted the TV show “Wall Street Week” for some 32 years.

During the lunch, Lou leaned over to me and said with a mischievous look, “Well, Leo, what do you think of the market?”

I looked at him, leaned forward and said, “Well Lou…what do you think of the market?”

He leaned back and smiled. Then, Lou got up and gave his talk. He told the people he was going to tell them what the stock market was going to do. Many in the crowd leaned forward.
 
Then, quoting J.P. Morgan, Rukeyser said: “The stock market will fluctuate.” The crowd moaned. They felt tricked.

The truth is they were not tricked. Rukeyser told them a profound truth. Although we, as investors, work hard analyzing companies and stocks, the truth is, we don’t really know what is actually going to happen.

If you think you do, you are trying to impose your will on the market. You will pay dearly for that mistake. The best way to approach the market is to make your investment decision and, then, be ready to act decisively in the face of any possibility.

In late July and also in August, the stock market went through some volatile sessions that shook the nerves of both bulls and bears. Nevertheless, if you had your buy and sell strategies in place, you should have done okay and avoided getting burned. The key, of course, is to have a disciplined rule to exit a trade, whether long or short. That may also mean placing a protective stop order.

Take the case of Metro PCS Communications Inc. (PCS), an IPO from April. It set up a very good-looking nine-week base (see following chart). The base was bracketed roughly between 32 and 37. The key breakpoint for the stock to emerge from the base was 37.

The firm, a provider of wireless communications services, had a good earnings outlook. So, on July 12, the stock broke out from its base by getting to 37.25 on the close. In the next several sessions, it advanced, getting as high as 40.87 on July 20. All seemed well.

However, a smart investor knowing that “markets fluctuate” would have already set up a defensive selling plan just in case. For instance, he or she could have set up a stop sell order at 37.25 to exit with a breakeven if the stock backed up.

PCS did! In the next four sessions, PCS declined and the stock hit a low of 34.46. So, the stop sell order would have taken one out of the stock. PCS then rallied back 39.20. One would have thought that the sell was a mistake. It wasn’t.

The stock market went into a dive. So did PCS. It tumbled to as low as 25. If one would have held on, he or she would have suffered as much as a 32 percent decline in the position. The stop strategy saved the day in this instance.

During the same time period, the Dow Jones industrial average dropped from roughly 14,000 to 13,000 (7.1 percent). Often, in stock market pull-backs, many issues will be dragged back double or triple the market averages. The thing is, you do not know when they will take place. Yes, you can calculate and figure. But, the truth is, you do not know for sure. That is why a clear selling strategy is always wise.

Top investor William O’Neil disclosed in his book, How to Make Money in Stocks (published by Investor’s Business Daily), that when he started out, he did poorly because he did not have a set sell strategy. He figured one out that fit his buying approach, and from there, he did extremely well trading stocks.

His basic sell strategy was never to suffer a loss of more than 5 percent on a stock position.

Paul Tudor Jones, a top trader whose worth is estimated at 2.5 billion by Forbes, had this precious gem of advice for investors: “Take care of your losses and your profits will take care of themselves.”

Another wise sage said: “The idea is not to be perfect. The idea is to make money.” His word was to console those who tend to be greedy, always wanting to hold a position in order to milk the last penny of profit.

Justin Mamis wrote a very informative book on selling appropriately called When to Sell, published by Simon and Shuster.

eSignal subscribers should always have a set plan to sell a position. Take the time to study and research the best selling tactics that fit your own personal investment strategy. Then, implement them.

Mr. Fasciocco’s articles appear at www.tickertapedigest.com. He is a contributing writer for several national publications. He is also president of Corona Investment Management.

Mr. Fasciocco can be reached at leo2@tickertapedigest.com