On NBC you may have seen the game show called “Deal or No Deal” starring Howie Mandel and 26 wonderful ladies with their respective briefcases. The premise of the show is for the contestant to select random briefcases holding dollar mounts from $.01 to $1,000,000, trying to eliminate cases without picking the higher amounts. As the cases dwindle and depending on what amounts are left, the “banker” will offer the contestant a dollar amount that contestant must accept (Deal) or not accept (No Deal). If the contest chooses “No Deal”, they keep selecting cases that will either increase or decrease the banker’s offer. Pure entertainment flourishing at its finest.
The Greed That Lies Within
What I find appealing of the show is that it brings out the greed that exists in most all of us. I have seen contestant after contestant fumble their way from a sum of money that would have literally changed their life to an amount that barely made the whole experience even worth it.
My most memorable contestant was the single mom whose only goal was to win enough to pay for her son’s college education. She was cruising right along and the highest offer was well above $150,000.00; far exceeding her goal before the show. All she had to do was say “Deal” and her life would have been forever changed. She did not and ended up walking away well under $10,000. It’s a sad story, but how do you really feel sorry for somebody like that?
Are Stock Buyers Greedy?
Relating the show to stock investors is quite easy. Many times I have had clients that have purchased a stock with the goal of making let’s say 20%. When the 20% is reached, they want to hang a little bit more to get to 30%, 40%, or maybe even 100%. The outcome is usually not pretty.
Instead of locking in the gain, we’ll watch the stock drop back to its original purchase price. Upset that they didn’t lock in the gain, they decide to wait it out until we get back to the 20% gain and then they are “definitely getting out“. Then the stock drops below the purchase price. Even further upset, the client decides to wait to hang on and wait till they can sell to break even. I think you see what direction we are heading.
Remember Your Goal
Sometimes we have to remember what our goal was in purchasing the stock. If your goal is to make 10% then that’s when you sell, no matter what. If you can’t stand to lose more than 10%, then the same rule applies. Get out when you said you would get out.
Can’t Control What Happens Afterwards
Sometimes the stock will go up in value after you sell it. It just happens. Do not get frustrated about what you “could have had”. It’s impossible to predict when the exact time to sell it. Be grateful that you actually made money, especially with the recent crummy market. And always remember that selling a stock at a profit, no matter how small, is a better “deal” than going home with an empty briefcase.
You mention when buying stock to remember your goal when you first started. For example if you want to increase 10%, then sell. I don’t think many people go into buying stocks with this type of approach. Especially since a lot go in for the long run, it seems difficult to have that goal in mind. Do you find a lot of people buying stocks with a goal or mainly just winging it till they feel comfortable to sell?
It is definitely a mindset that must be developed with extreme self discipline beforehand. We can all say what we would do if we were in a person’s shoes who is oon the show, but who knows how we would really act in that situation?
The answer is simple if you still to your developed mindset of extreme self discipline and go according to the number you determined previously.
Another great post Jeff, you seem to everywhere I go. I must admit that I get pretty greedy sometimes when it comes to stocks. One of my shares over the summer (an oil company) grew about 30% but for some reason that was not enough for me. I waited and I waited until you know what happened. Now I’m back to waiting for the share price to hopefully make a comeback. At the moment I am holding another share that is steadily growing amidst all the economic turmoil. The only difference is this time when I hit goal I’m selling and cashing out.
@ Craig
When I look at my investments I have different goals for each. I have my mutual fund/ETF portfolio that is pretty much a buy and hold with occasional rebalancing.
With my stock purchases, I do have more of a goal in mind. I will admit that sometimes I,too; have fallen into the same trap but most of the time I will put a standing order in to sell at a certain price. That way it’s now out of my control and temptation for more. This is what I usually recommend to my clients, but I would say that only half listen.
@ Studenomics Just making my way around the blogosphere :) Your story is one that I’ve heard countless times and have experienced myself. It usually only takes one mistake to realize what we need to do different. Sounds like you’ve learned. Congrats!
@Jeff Is there a way to set up an automatic sale on stocks? That way if you do want a goal of 10%, and the stock hits that, it will automatically sell. This way it will take the whole mental aspect out of it and you don’t have to worry about making a decision.
Would be nice if you could have that for the casinos as well, ha.
@ Craig Absolutely, we call them GTC (Good till Cancelled) orders. Basically, you set the price and it will execute automatically no matter what. Disclaimer: if you have a small amount of shares and it’s not a round lot (increments of 100) then it would be possible for your order to be passed up by a larger investor or institution. Especially, if it only hit’s your target price for a short time. But if it’s your price and stays around that level for a good period of time, it should be good to go. I don’t think I’ve personally ever seen an order that didn’t fill using this method.
No doubt on the casinos, with my luck I would be automatically cashed out within the first 10 minutes of being there.
@Jeff Didn’t know about the GTC’s, thanks for that. I don’t currently have investments, trying to slowly learn a little more so I can begin investing if I desire.
10 mins beats me, no more blackjack for me, I lose too quickly.
Does it make sense to set a 10%, 20%, etc. goal, or would it make more sense to look at other factors such as P/E, potential for earning growth, etc. and sell when the P/E gets to high or company’s future growth slows, or because of economic conditions.
I admit I was guilty of being greedy, but in each of these times I ignored economic indicators or the fact that stocks gotten ahead of themselves i.e. went up without too far too fast without good reason. But it also seems to me that if you always sell after a specific percentage gain you can miss on long-term winners such as Microsoft in the 80s.
@ kitty
You make an absolutely good point. I think a lot depends on what you are trying to achieve and how much loyalty/faith you have in the company.
One other thing to consider is the theory of efficient market. Basically, meaning that P/E ratio, earnings growth, etc will already be priced in the stock. And if you’re not following the stock close enough, you may miss the opportunity to lock in your gain.
Just some food for thought, but I do respect your rationale.
Jeff,
Excellent post! I got burned by this once, I set a target of $6.00 to buy 100 shares of DAVE and one day it made a definite move in that direction, so what did I do? You guessed it, I adjusted the target lower by 15 cents/share. DAVE did hit that price, but as you note bigger fish were served first and by the time they got to my order, no more of DAVE was available for that price. Too bad, as it wasn’t too long afterwards DAVE hit my target sell price, I would have made 50% in short order.
If you are going to speculate develop a plan and execute that plan.
Once again I am looking at some DAVE, PCL, and COLM.
I think the overall point of remembering your goals is important in any type of investing that you do, regardless of whether it’s stock buying on mutual funds where you plan to hold them for the long-term. You’re absolutely right about people forgetting their goals and letting that greed take over, but my experience with investors has been a little different than yours in that once they lose money, they start pulling out.
I don’t sell investments anymore so I’m a bit rusty at all of those discussions, but the credit union I work for has it’s own investment division and the guy that covers our branch said the conversation he’s had the most with his clients recently has been to remember their initial goals.
Everyone they pick for that shoe seems to be wackos. I think the show intentionally picks people w/ that type of personality so everyone at home can complain that they made stupid decisions. I think its more entertaining like that.
This advice doesn’t make sense. If a stock goes up 10% and you sell it and it goes up a further 10% then you’ve lost 10% by selling.
Every day is a new day and it doesn’t matter what you bought the stock for, it only matters whether you should sell or buy today. Imagine if you bought google at $85 and sold at $93 to lock in your awesome 10% gain? Imagine if on Jan 15 you owned $300 google and sold at $270 because it went down 10%, today it’s back to $300?
Lots of people suffer from believing that a run will continue forever, which is what I think you’re talking about. Predefined rules locked in ahead of time are just as bad though.
@Goal Hunter,
What Jeff (and correct me if I am wrong Jeff) is talking about is speculating or perhaps a better phrase would be short term investing. As we know, most financial advisers tell us to go long & long term.
However, if you develop a plan and stick to it you can do okay by speculating & day trading. Yes, the speculator realizes he may lock in his 10% profit to forgo another 10% on their return, but they could just as easily lose their gain if they ride it out another day.
The day trader/speculator is not looking for the home run, they are looking for singles & doubles. They are guerrilla investors looking for a large number of small wins and when they lose they only want a small loss.
First line of the article says he’s a “Certified Financial Planner” so I assumed he’s talking about financial planning not day trading. Yes, for day trading you definitely are looking for tiny volatility or arbitrage plays without much regard for future potential. I do the same
I guess the point is that there are many systems and the game has imperfect knowledge and randomness. Great poker players don’t make money on most hands. When a player throws his money in on 60/40 odds and loses, it doesn’t mean he made a bad choice. Every one of us with a dollar in the markets in September last year would have done a lot better to be 100% cash, but that’s bad advice in general.
@ Goal Hunter
Let me first say, that “day trading” or “short term trading” represents a tiny fraction of my practice. Diversification is key and is the foundation for any portfolio. That being said, after the foundation is in place and the client has excess funds to dabble with, we will explore purchasing individual stocks. Okay, there’s my disclaimer.
Now, on to your point. I really think your second line supports the basis of my post, “If a stock goes up 10% and you sell it and it goes up a further 10% then you’ve lost 10% by selling.”
Let’s look at that closer, “it goes up a further 10% then you lost 10% by selling”.
1. When you are in the stock, how do you know it’s going up another 10%?
2. How do you lose 10% when you never had it to begin with?
Using Google as an example is easy, because anybody can look back at a chart and see it was $85 bucks a share. What about the person that bought it at $700 and was riding it to $1000? Would then selling at a 10% profit not seem like that person made the right play?
The 10% is arbitrary. You can choose your own percentage that satisfies what you hope to get out of it. Remember, you can only lose what you have, not what you think you might get out of it.
This can also apply to rebalancing a portfolio that you are in for long term (IRA, 401(k), Roth, TSP….).
It’s really hard for me to sell a segment that is doing well in order to buy one that is doing badly. (Not that is a problem now, since EVERYTHING is doing badly LOL.) But I know that re-balancing and staying with my planned asset allocation is important.
Hi Jeff:
I agree with the discussion as it applies to short-term. It does sound like fair advice. But I would add that I personally look back on every decision. I don’t lament something I could not really have foreseen, but if I sell at 10% and it goes another 10% then I evaluate my decision as being only 50% effective. I put my money at risk and I could have got twice as much for the risk after all. Similarly, if the stock goes down 50% but I get out at only a 10% loss then my grade is 80% effectiveness on that decision.
I did daytrade for a while and I found that I was taking risk disproporionate to the gains. On volatile stocks I could make “free money” a lot, but every so often I lose big time when the thing drops out from under me.
Now I still do speculative trading but not day-by-day and I search among the super-losers for winners. I sprinkle a little cash on the guys who got absolutely beat up by some botulism or lead paint or some other disaster and hope they multiply themselves during the course of a year. Many languish and some expire but the ones that go up 5X or 10X more than pay for the ones that die.
I agree with you completely. Self discipline is the key here. Go in with a plan.