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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Monday, July 11, 2005

Best Buy / Money Management

Today I had a discussion with a co-worker of mine who I have had discussions with regarding stocks. I like to think that I have made him some money, or at least, kept him from losing some.

He recently loaded up on Best Buy after the fantastic earnings report. He said that his goal was to make 15% on the stock and sell if he did.

Today he said he'd already made more money on the stock than he'd expected to and was thinking of selling it. All of it. He wondered, though, if he should hold it.

This brings up a common pitfall people have when thinking about positions and how to manage them. That is, people tend to think of their positions as all or none, when, in fact, they are not. There is no rule that says one must buy all your shares at once, nor sell them all at once. My suggestion was that he needed to still be in the stock, because it would appear that the exuberance has not even come close to wearing off. But, he might think about selling 1/3 of his position (or 1/4 or 1/2, though 1/4 seems too small to me). This does several things:

1) It means you made money. Remember, you haven't made any money until you cash some out. If the stock falls to the point where you think the market is wrong, you can always buy it back!

2) It pays for the trade AND covers quite a bit of downside risk. By taking some profits off the table, a terrible news event might knock the stock down to breakeven for the position. Of course a stock COULD theoretically go to zero overnight, but the likelihood of this is fairly improbable.

3) It allows you to play with house money. Since, like #2 mentioned, this trade is now almost risk-free, it means that you are in the best place possible - playing with money that is no longer yours.

4) It gives you peace of mind. Because of #2, and #3, you can rest that the position can move for or against you and...

5) you will be able to think much clearer and evaluate your decisions as the position unfolds over time.

You do need to let your winners run, but it's ok to take money when the market makes it available! Scaling back on a position is not a bad thing to do, as long as you are disciplined enough to get out of your losers very, very quickly.

By the way, Best Buy is headed higher.


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