Rav Shark:
In a Divine Market, Selling Isn't a Sin
11/23/2005 8:48 AM EST
"Managing is like holding a dove in your hand. Squeeze too hard and you kill it, not hard enough and it flies away."
-- Tommy Lasorda
Having an opinion about where the market is headed doesn't relieve us of the obligation of managing our portfolio. An easy mistake to make is to think that because you are bullish, you simply put your money in the market and sit back while things run higher.
Although that may work well in some cases, superior returns require more active management. Even in the strongest markets you will want to do some selling and take profits. It isn't easy to decide what and when to sell when a market looks as good as this one. If you hold on to your positions too tightly you risk giving back some big returns when the market corrects, but if you let go too soon you risk being left out of further upside.
You don't have to be bearish about the market to do some selling, and there is nothing that precludes you from buying new positions and staying long. It simply is good money management to have a system to lock in gains when some of your holdings become extended.
In a strong market it is easy to worry more about being left out than it is to worry about protecting what you already have. We want to enjoy every last penny of a strong run, so you hang on to stocks that are becoming more and more risky, and they elevate.
Selling and being bullish are not mutually exclusive actions. In fact, I often find myself selling when I am highly bullish simply because I believe that there will be better ways to take advantage of the market upside.
Yesterday afternoon was one of those times I felt that the prudent thing to do was to sell into the strength. Not because I think this rally is ready to top out, but because I believe the market is going to give us an opportunity to redeploy capital in stocks that have better upside potential than some of the extended issues I was holding.
Despite many gurus' claims, stock market success requires much more than simply having the correct bullish or bearish bias. Above average results require effective management regardless of your opinion about the market. Being long in a bull market doesn't mean you sit and do nothing.
We have a mixed start as traders begin to wind down in front of the holiday. We are closed tomorrow and then have trading until 1 p.m. EST on Friday. Oil and gold are trading down and overseas markets are up just slightly.
Gary B. Smith: