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Selling, Selling and more Selling
Author: Bob Lang (info)
Website: http://trade-mentor.com
Posted: June 20th, 2007 at 8:10 am EST
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Today I wanted to talk with you about selling…could you guess? There are dozens of different reasons to sell…and we’ll touch upon some of them. The bottom line question in all cases is if we should be the buyers.
Case #1 - IPO
We’ve been hearing alot of buzz recently regarding the private equity area, specifically with the release of stock on the market in the form of an IPO. The first one to go was earlier this year was in Fortress Investment (FIG). Lately some other big names such as Oaktree and Blackstone plan to dump shares on an unsuspecting public. Why does this sound so negative? Because that is what they are doing…dumping shares on the public when the ‘perceived’ value is at or near its peak. Why not? The media seems mesmerized by private equity because of the mystery involved (it’s private for a reason). But, what is the market actually getting with the release of these shares, and more importantly..what are the founders/managers receiving? We have no idea what investments these firms have made, how long they plan to hold them, etc. Sure, the ‘talked about returns’ of private equity rival those of public funds, and the managers are considered mavericks with legendary status. But doing your due diligence may very well uncover that these investments are overrated, even worse…overpriced. The managers of these firms are selling to the public at top dollar, likely cashing out millions in equity that had never appeared before. One need not look any further than the performance of FIG to see that it was good deal for them and not us (the stock is down 30% since the Feb IPO). Be cautious and don’t buy into the hype of these investment vehicles.
Case #2 - Insider sales
One area that is watched closely is insider trading…not the illegal type on priveleged information, rather the trades that occur by insiders of a company not driven by undelivered ‘news’ or ‘events’. Insider buys are typically seen as support by management and confidence in the business. Insider sales can be viewed several ways, but one in particular is the lack of conviction in the company. Certainly some managers has ‘planned’ sales where they make trades based on timing of option grants and pre-determined dates. That’s not too troubling, but when everyone hits the exit at the same time…then that should be viewed as a warning sign. You may want to steer clear of a firm that has heavy insider trading that has developed a strong pattern by management.
Case #3 - Taking a profit
Not as easy as you think. I get alot of questions from traders each day, newbies and experienced ones alike. The bulk of questions regard different trades, but I have found that the one common question among them all is ’should I sell this name that I have a nice profit’? First of all, why ask me? Shouldn’t they be asking themselves the question? Shouldn’t there be a plan in place PRIOR to opening the trade? Of course. But, when one is presented with a profit due to good work, study and a great entry point, nobody wants to stop winning…or, be responsible for ending it. If I say, ‘yes, it’s a good time to take it off the table…or perhaps just some’…it takes the decision out of their hands. No more blame for holding too long or selling too soon…it’s my fault (theoretically, of course…but that’s the mindset of traders). I think if you have to ask someone if you should sell, you’ve probably answered that question already.
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Bob Lang, Trading
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