Sell Alert: don’t ignore what’s staring you in the face
6th February 2020 |
Originally published under Growth Stock Network on 6th February 2020.
I’ve been doing a review over the last week about my approach to recommendations. How we deliver them, how we filter them, how we set up our vision for performance and how we manage potential downside.
Being an eternal optimist, the hardest challenge is to manage downside that comes thick and fast. When you take a positive proactive view on markets, then when there’s downside, you can’t help but see the potential that still exists.
And being involved in markets since I was 11 years old, you also see that long-term markets wildly fluctuate, but that over time, investing in equities (stocks) is one of the best ways to build wealth.
That means when you see crashes like 1999/2000 and 2008/09 it’s easy to get scared. But it’s also easy as a “perma-bull” to see the upside that comes off the back of these events.
Now that’s looking at the overall market. What we know is that when you invest in small-cap stocks (on any market) it’s a little dangerous to apply wider market principles. That’s because small-cap stocks tend to march to the beat of their own drum.
That’s partly why I love them so much. You can have a wider market downturn and still find little gems that will buck the trend and pump out returns. However, on the flip side, the market might be humming along, and some small caps will be down in the dumps.
They really live and die by their own sword, no matter the market conditions. And that’s great, and exciting, and terrifying. It also means you need to be on the money (so to speak) with keeping an eye on trends, peaks and troughs.
You’ve also got to be prepared to make hard decisions on when to enter, and then when to exit a stock. That might be an exit for a loss, it might be an exit for a gain. Either way, you’ve got to be able to step back and take a more rational approach to managing these small-cap stocks.
That rationality also applies to getting into a stock as well.
For example, it’s easy to get into a stock, see it rise, add more, see it rise, add more again in anticipation of further rises. This is sometimes known as an optimism bias.
That’s where we become overoptimistic about good outcomes. Where we might see a stock skyrocket and then become overoptimistic that it’s going to rise even further again.
Meanwhile, a rational person might step back and access things and say, nope – that’s popped hard and fast, you might want to be careful of a pullback here.
In the last week this optimism bias has cracked full tilt into a stock everyone knows about, Tesla. In the last five days it went from US$639 to an intraday high of US$968 on Tuesday.
Optimism bias was in full force. In fact, at one point I recall seeing a report from an analyst saying that it would march past $1,000 and by 2024 it would be trading around US$7,000 and in a best-case scenario, US$22,000.
Now I’m optimistic about things, but that’s just a little bonkers, don’t you think?
The point being that since Tesla’s high on Tuesday, it has ripped US$233 off its stock price. Now what you should remember is that at US$968, people might have been selling the stock, but equally as many were buying it.
Also just to give some perspective, around September last year Tesla’s stock was trading at around US$230.
In just one day, it wiped the entire value of its September stock price off its current stock price.
Does that sound normal, rational or a little crazy to you?
Such a stratospheric rise in such a wild, short period of time, meant a hard pull back was a near certainty. And hindsight now shows us that’s exactly what it did. The smart investors exited the stock as the mania took hold.
The investors trapped by their own biases and hype-train got in at the top, and are already feeling the pinch.
The moral to this Tesla story that’s captivated the investment world this week is to be smart with your investments. Take great profits when they’re staring at you in the face. Execute with minimal emotion and then move on.
That’s the idea behind what we’re doing at Growth Stock Network. We look to bring you into stocks with great, big, exciting investment ideas behind them. It is within these investment ideas that something might strike a chord with you and you decide to invest in our recommendation.
We’re not building a portfolio that we manage for you. We don’t apply weightings to our recommendations. That’s your job. We’re here to bring you the recommendations and ideas that you will pick and choose to build your own portfolio.
And while we will make entry and exit recommendations, the ultimate responsibility to get in or out of a stock rests with you. Only you know your investment plan, your time horizon, your tolerance for upside and downside risks.
We will recommend the use of conditional orders to protect your backside on the way up, and on the way down. But where you put them in the market is up to you.
We’re here to empower your investment decision-making process. We know not everyone invests in all our recommendations all the time. That’s because you should take each one on its merits and ask yourself if it fits in with your strategy.
And when we think it’s time to be rational and exit a position we’ll say so, trying to help take out some of those biases that can creep into your thoughts.
Looking at our list of recommendations, there’s one that sticks out at us, that screams at us, “Be rational. Be smart. Know when you’ve struck a good thing.”
And that’s Blue Prism Group [LSE:PRSM]. The stock has been outstanding in the three and a half years it’s been in the recommendations list. It’s sitting on a current gain of 1,463%. There was a wobble there for the back half of 2019. But the stock has gone on to make a serious recovery.
However, these last few days have reminded us that we don’t want to tempt fate twice. We think those returns are too good to ignore and that with a three and a half year time period it’s a great time to exit the stock, take those profits off the table and look to new opportunities.
Action to take: SELL Blue Prism Group Plc [LSE:PRSM] in the market. We will record tomorrow’s opening price for track record purposes.
Regards,
Sam Volkering
Editor, Growth Stock Network
