Exit is More Important Than Entry

Exit is More Important Than Entry

If you’ve been a member of the MyWallSt community for a while now, you’ve probably heard either myself or somebody else on the team say something along the lines of:

“Never sell.”

“Buy and hold until you’re grey and old.”

“Our favourite holding period is forever.”

Ok, that last one was actually Warren Buffett, but you get the point. 

Of course, this advice is meant to be taken with a pinch of salt. Everyone has to sell positions at some point in their life, whether it’s to call it quits on a company you don’t believe in any more, to raise cash for a big purchase like buying a house, or even when you retire. That’s probably why one of the most frequently asked questions we get is “when should I sell?”. 

A close second in terms of FAQs, however, is almost the complete opposite. Every single day, we get people writing in to ask us “is XXX overvalued at the minute?” or “what price target should I aim for with YYY?”. (To be honest, it’s usually about Tesla).

When you think about it, this makes perfect sense. When you should buy and when you should sell are really the only two decisions that your entire investing life can be boiled down to. Just think of it — all the noise and commentary and Twitter threads that you read every day — they’re all really just asking one of those two questions.

Here’s an interesting thought, though. For all our preaching about holding long term, I actually think the decision on when to sell stock is much more important than the decision on when to buy stock. 

Why’s that?

Take a look at your portfolio. I’ll assume that you have a couple of stocks that are up and a couple of stocks that are down. Looking at your winners specifically, ask yourself how important it was that you opened your position at the specific time or on the specific day you did. My bet is that, unless you invested right before a blow-out earnings call or the company discovering the cure for cancer, the exact price you paid doesn’t really matter all that much now, especially if it’s a position you’ve held on to for a good few years.

Last week, I wrote about how decision paralysis can stop you getting started and waiting for the perfect time to open a position is one of the biggest challenges people face in relation to this. Recently, our CEO and chief investor Emmet analysed all of the buy decisions he made from the end of the 90s to the end of 2017. You can check out the full thread of his findings here, but one of the most amazing things was the fact that 98.1% of every trade he ever made fell below the price he purchased it at some time after buying.

To put it another way, this means that Emmet — who, I can assure you, spends almost every waking moment thinking or talking about the stock market — only managed to hit the bottom when opening a new position less than 2% of the time.

When you first open a position in a company, you begin to create a story of how that company impacted your life. The price might go up, it might go down, it will almost certainly do both… multiple times. However, the story never starts if you don’t open the position in the first place and the story doesn’t end until you decide to sell. That’s why deciding when to exit a position is so much more important than deciding when to enter one.

JamesJames

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