The Investment U e-Letter: Issue # 417
Tuesday, March 08, 2005 Investment Decisions: the Good, the Bad, and Investor Exit Strategies
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U My best investment decision earned 40,000 savvy readers nearly 900% returns in less than two years… And my worst investment decision lost people half their money, or more. Today I'll share what I think those good and bad investment decisions were… because one factor caused the big success as well as the big failure. And it has everything to do with investor exit strategies and nothing to do with the investment analysis. First, the Good: My Best Investment Decision… Back in 1999, I was writing an investment letter to more than 40,000 people. I really didn't trust the high-tech boom. But as Dennis Gartman said in his daily letter today: "We know of few things that we can count upon in the world of trading, but we know this: A trend in motion tends to remain in motion far longer and move far farther than anyone wants or can believe…" So we stayed on board, and it turned out to be a good investment decision. We kept a buy on stocks in the newsletter, including shares of JDS Uniphase. JDSU went up 100%, and we kept a "buy" rating… 200%, still a "buy"… 300%… 400%… 600%… 800%… And still a "buy." Of course, it was ridiculous. But we were comfortable. The stock was volatile. But the upside potential seemed infinite. And we had our secret weapon in place to protect our downside risk: our 25% trailing stop. And so JDSU went up well over 1,000%. Then it fell by 25% in early 2000, and we hit our trailing stop. We sold. We walked away and didn't shed a tear about our investment decision. Ultimately, the shares went right back to where they started. They went from $2 to near $140 and back to $2 today (when you account for stock splits). 
All the way down, readers were asking us when to get back in. But one of the hardest lessons to learn is not to fall in love with your investments. We've never looked back, and never bought it again. This near 900% gain that readers pocketed had very little to do with investment analysis. Sure, it took the right investment analysis to make that pick, but you've got to attribute much of the stock's rise to the hype of the day. And you've got to attribute most of our ability to pocket such an enormous gain to having a sell discipline. We used a 25% trailing stop. Many readers may have bought late. But if they followed our discipline, they still would have pocketed hundreds of percent gains. However, I think that most people don't use a trailing stop. Instead they say, "It'll come back." But JDSU never did. And most tech stocks still haven't recovered their highs from five years ago either. In late 1999, we might have had 20 stocks on our recommended list. By April of 2000, we'd stopped out of nearly all of them. In hindsight, I look like a genius with that investment decision. Were we just brilliant to get in at the bottom in stocks like JDSU, and sell out at 25% off the highs to pocket a return of almost 900%? Nah. Our disciplined sell strategy deserves the credit. Next, the Bad: My Worst Investment Decision Back in 1993, I was a broker. I had all the education I needed behind me, or so I thought. But it turns out there's a huge difference in investment "theory" and "practice." And I was about to learn that lesson. Emerging market stocks like Hong Kong's Hopewell Holdings were all the rage. And my clients were piling in. The story was fantastic. And our head of research headed to China, and gave it his blessing. By late 1993, the stock was going up every day. Thousands of customers of the firm I worked for were buying. The sky was the limit. And then, for no particular reason, in January of 1994, the sky was apparently hit. What had gone up every day was now going down every day. Our head of research said the company was fine. But money was flowing out of emerging markets. There might be nothing really wrong at the company, but our company's customers were really losing money. Worst of all, we had no plan… no exit strategy… no definite point at which we'd go ahead and cut our losses to stop the bleeding. Bad move. It was quickly turning into my worst investment decision. To this day, Hopewell is still over 50% below its early 1994 highs. Those who held on without an exit strategy not only lost the gains they'd made from 1992-1994; they've been stuck for 10 years in a loser. Ouch! 
I got an offer to be the vice president of a global mutual fund not long after that. So I don't know how many people held Hopewell (or Hope-"less," as it became known among traders), but I'd bet many still do to this day… "I'll get out when I break even." What Caused the Best AND the Worst? Investor Exit Strategies… or Lack Thereof I ranked these the "best" and the "worst" simply because they both affected me the most. They were the first things that came to mind, and there wasn't a close second. And in hindsight, one factor caused both… the lack of any investor exit strategies. It didn't come down to research. Both Hopewell (plus other emerging market stocks) and JDSU (plus other tech) were thoroughly researched. The homework was thoughtful, original, and well done. In one case, it led to large profits. And in the other, it led to investment purgatory. The lesson from both of these is to have an investor exit strategy: know when you're going to get out in advance, no matter what. Investor exit strategies of some sort could have gotten clients out of Hopewell, probably with significant gains. And not having an exit strategy in JDSU would have led you to buy at $2 years ago, and be stuck at $2 today. Of course you can always do what you want… though I do recommend the trailing stop as an exit strategy. Without it, I definitely would have recommended selling JDSU way before it was up over 1,000%. The primary reason to use the trailing stop as your investor exit strategy is to allow your winners to ride as far as possible, following Dennis Gartman's observation… "We know of few things that we can count upon in the world of trading, but we know this: A trend in motion tends to remain in motion far longer and move far farther than anyone wants or can believe…" I hope the message today is clear. It is to me… I always use investor exit strategies today, without fail. Good investing, Steve Related Articles Investment U Archives | 
