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Stock Up 20%, What Should I Do?

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Let’s say that you own a stock and that stock just spiked 20% in a single day, what should you do?

It depends! (that’s the usual answer isn’t it?) Like anything else dealing with money, you always have a plan to get in and a plan to get out. Take, for example, buying a car. You don’t buy a car without thoughts on how you’re going to sell it (or otherwise dispose of it, like giving it to your children, or nephew/niece, or whatever), that’s why people care about the resale value of a car… it’s how you get out and get into a newer car. Well, the same applies to a stock right? Ahhh… see this is where people slip (myself included) because they think that they will be able to tell when they should get out as the stock moves. That’s why you see people talk about 1000% gains on paper that get realized and are either tiny gains or even losses (dot com anyone?).

So, back to the question at hand, up 20%, what should you do? Depends on your game plan. If you did your analysis (to be honest, I don’t do much analysis, that’s why I stick most of my money in target retirement funds or index funds), you should know where your exit point is – is it +20%? If so, then you want to get out now. Is it 30%? Then you’ll want to wait a little bit.

How do you determine this exit point? One common approach, which is how analysts often issue price targets, is that you take the return on equity (or some other return number) and apply it to the stock price. Has the company shown ROE or ROI (or whatever) of 15% each year for the last five years? Ten years? Then you’ll want to project that onto the stock price to see where it goes. If the price spikes 50% in six months, perhaps you want to take advantage of the exuberance and take some money off the table.

Either way, the point is that the 20% gain doesn’t matter in a vacuum, it only matters in the context of your overall investment plan.

{ 9 comments, please add your thoughts now! }

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9 Responses to “Stock Up 20%, What Should I Do?”

  1. MFJ says:

    Stop trying to predict short-term fluctuations. If you bought the stock because you thought it was a good company and would provide you a good return, why would you get out because the stock actually did what you thought it would do. What makes you think that now the company is worse off just because their stock price jumped. I don’t know if I’ve owned a stock that hasn’t risen or dropped at least 20% in a couple days. Stop watching your stocks so closely and just sit back relax. You’ll never be able to time short-term movements like this and if you act on a short-term movement like this you will end up hurting yourself.

    Just my two cents –

    MFJ

    • jim says:

      Who said I was trying to predict short-term fluctuations? I was saying that you should act based on your plan, not based on the movement itself, what’s wrong with that? Did you read the whole post?

  2. MFJ says:

    Yeah I read the whole post :-) I may have come off a little sharper than I wanted, but basically I think it’s a slippery slope when you start paying attention to short-term fluctuations and makes you want to act when you really should just be focusing on why you originally bought the stock.

    I dunno I’ve never really looked for exit points on any of my investments. Maybe I’m in the wrong with that philosophy but I personally don’t believe in taking profits off the table unless things are completely out of whack, which again can be a very hard thing to judge.

    I guess my question would be what fundamentally changed with this stock other than a quick 20% blip in stock price. Is it likely to become sub-par performer in the long-term because the price shot up on a given day? I dunno I personally am against the taking profits mentality because it leads you to think you know what you are doing with short-term fluctuations and in the end it probably will just drive up your trading costs and lower your investment returns, which is why index and target retirement funds are such a good idea. The less thinking us individual investors have to do the better our returns are likely to be….sorry if I came across wrong in my original comment.

    • jim says:

      I think knowing your exit point is crucial, it’s not that the underlying stock has changed but the value of the shares have and to ignore that would be a mistake in my opinion.

      If shares of stock go up 20% and it’s for no reason and you wanted that level of growth in a year, I’d say sell. If it went up because revenue or profits beat estimates, then your plan changes. You should act according to your long term plan, which includes share price, and how that’s adjusted by the situation.

      You didn’t come off harsh or anything, just too focused on the “selling the swings” aspect which was never part of it. To ignore a gain is just as bad as trying to time the market.

  3. MFJ says:

    Yeah just a difference in opinion – I don’t think either one of us is necessarily right/wrong.

    Just in my opinion I see trying to act on the gain especially a fast blip like that IS trying to time the market. That being said I have bought more of stocks when they have fallen a quick 20% for no perceived good reason (in my book still trying to time the market). Exit and entry points are great and there is certainly weight behind locking in that 20% profit, but the minute you do it will go up another 40%. :-)

    There certainly is no right or wrong and everyone’s got a theory on the best way to buy low and sell high. I just personally have found that completely ignoring gains or losses during short periods of time works for me with individual stocks. The minute I start to follow the roller coaster and act on dips and rises (of which have very little basis in reality when it comes to the true value of the company) I have found I probably make rash or stupid decision to buy or sell based strictly on me trying to take advantage of/time the short-term market movements.

    IMVHO you should only sell an investment if it absolutely does not make long-term sense in your master portfolio plan. Yeah it’s great if profit beats estimates or revenue increases – but those are just quarterly short-term measures that give you insight but certainly don’t tell you the whole story about a stock’s future. Analysts tend to focus on the short-term as well and honestly are dead wrong especially with price targets way more often then they are right. It’s a big pool out there with lots of people who garner inside information and other facts that you and I as lowly individuals can never take advantage of so even if a stock jumps 20% for what we think is no good reason – there may be a good reason we just don’t know about yet.

    Also need to consider transaction costs (selling and buying something new) and taxes (if not in a retirement account). Ok I’m done rambling….I can see your point but I’ll just say it’s a slippery slope and unless you really do your analysis and stick by your guns, it’s very easy to fall into the buy…sell…buy…..buy…sell mentality.

    Ok last question – If your Target Retirement Funds or Index Funds went up a lot faster than you expected would you sell those too? If yes where would you move your money to?

    MFJ
    Who hasn’t blogged in a while and is spewing pent-up useless advice all over jim’s blog

  4. Jim, I wrote about this on my blog – click on my name above to read. I don’t mean to plug my blog, but I think I have a good handle on this issue, as you do.

    I don’t sell very often at all, but I would if I had a good reason to.

  5. I don’t think I’ve considered the exit plan in buying a car. I mostly consider the idea of needing to get from one place to the next.

    I consider quite a few other things, but I can’t anticipate things 10-15 years down the line, so I don’t. The longer I can put off the exit strategy on my car, the better ;-) .

  6. Phil says:

    I’ve already addressed this issue in a post on this site.

    The answer is very simple and works 100% of the time, provided you have the discipline to stick with it:

    Pre-determine a “stop-loss” point or percentage and ride the ride.

    A “stop-loss” is the point below which you absolutely will sell the security, and this point can inch upward as the security moves ever higher (otherwise known as a “trailing stop”).

    This way, you risk minimal downside and enjoy all of the upside.

    -Phil

  7. MFJ says:

    @Phil – isn’t stop-loss buying high and selling low?


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