Pennsylvania Investment Observer

Exit Strategy

by Daniel J. Nestlerode

Wall Street is well known for recommending investments for their clients to purchase. Historically on Wall Street, buy recommendations have exceeded sell recommendations by 10 to 1 or even more. Clearly, Wall Street investment firms do not like to tell people to sell investments and move to cash. They do like to convince people to sell something in order to buy something else (think: two commissions), but their research is not published in that manner. So, if you listen to Wall Street, they will tell you what to buy. However, there is almost never any research done on an exit strategy, or when you should sell the recommended investment. Selling strategies are largely ignored.

Investment success is measured by meeting your investment goals. For growth investors, looking to increase the value of their portfolio, success can be measured by comparing the compounded rate of return (hopefully to AIMR standards) to the similar rate of return for the appropriate market average, often the Standard & Poors' 500 Stock Average. Rarely does Wall Street provide this information to their clients. Indeed, most mutual funds do not provide this information to their shareholders. Yet this is the "bottom line" that sums up the net result from all the buys and sells and tells you if your efforts are successful. The skeptic in me tells me that if Wall Street isn't helping you with a sell strategy, then it is unlikely that they would provide you with a measure of your returns so that you could measure the quality of their recommendations.

Next time you get a great investment idea, hear one from a friend or read a Wall Street research report, ask yourself the following question. "If I buy this investment, how will I know when and under what circumstances I should sell this investment"? I know this takes a lot of the emotion and fun out of being enthused about a potential investment. Successful investing is not about being enthused about how you are really going to make a killing on this stock or mutual fund. It is, however, about making many buy and sell decisions over time and measuring the results (to AIMR standards) to see if you are beating the market averages. Persistence, it seems, trumps brilliance in the investment game. Then, if you are not beating the averages in your investment operation, you might want to look at an exit strategy for your current investment management team.

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