You hear a lot about “opportunity cost” when investing comes up and personally I’ve always viewed the term as mostly the sharks of wall street encouraging us lesser fish to keep the maximum amount of money exposed so they will have more of it to feast on. My own view on the subject is that only if you seize the opportunity to book profits and then wait patiently for the opportunity to buy equities when they represent an exceptional risk/reward are you likely to be a feeder instead of the food.The maxims “let your winners grow” or “water your flowers and pull your weeds” fall under a similar category IMO. To be sure there is some wisdom in the concept but given the only way we really can be certain about what constitutes a winner or flower is the price appreciation and given that prices can be fleeting, well, at a minimum I’d say it is easier said than done.I bring this up because I decided to take a look at the picks from the NPI 2012 contest from a slightly different perspective and instead of looking at just the current results look at it from the opportunities the picks presented the owners as viewed from their high water mark for the year.I personally view the results as telling and take comfort that my thoughts on the subject, at least for this one year, and with an admittedly small sample, would likely have led to vastly superior results.What I did and what I found…The first thing I did was to eliminate the repeat picks from the list, in addition I had to eliminate TomFoolNC’s pick of CCWIF because I couldn’t make sense of any of the quotes I was getting (maybe he can explain why it appears so Farked up) so instead of 45 picks we are left with a sample of 36 companies.Next I went and looked up the 52 week high for each company and calculated the rate of return had an investor sold at the absolute high for the year. (Maximum opportunity)What I found is when I averaged the maximum opportunity for all of the NPI picks it came to a 51.4% gain vs. the maximum opportunities from the NASDAQ of 22.7% and S&P of 17.2%.Looking at it a different way there were 6 picks (PATH, AXPW, GFKSY, CCIH, LWLG, DNDN) that managed increases over 100% and an additional 7 (total of 13) that topped out at over 50%. (LULU, YONG, VHC, CENJF, YMI, AMSC, MAKO)So how did “letting your winners run” turn out?None of the 100% plus gainers managed to hold on to even 50% of their max opportunity. PATH was the clear winner by holding onto 63.6% of what at one time was a 177.2% gain. The others …AXPW now 12.9% down from 137.0%GFKSY now 4.1% down from 126.4%CCIH now -4.0% down from 112.0%LWLG now -29.0% down from 129.7%DNDN now -35.9% down from 124.2 %Average decline, 132.5% from max opportunity.The 50% plus picks…LULU 73.8% vs. 81.1%YONG 43.2% vs.67.0%VHC 34.0% vs. 67.9%CENJF 25.9 vs. 49.8% Yeah I know I rounded up but it’s my pick and I get to set the rules. :<)YMI -1.2 vs. 50.0%AMSC -25.7% vs. 63.9%MAKO -47.6 vs. 79.0%After looking at things from this perspective I’d have to conclude that stock picking isn’t a problem with the NPI participants, that is of course, if anyone managed to capitalize (book profits) when the opportunity presented itself.I’d be curious to hear from others how they did, anyone get off the roller coaster on time and if so why? For me it’s been a bit of a mixed bag. With GUKYF (What I actually own not GFKSY which has no liquidity)) I did a crappy job of de-risking the position given the opportunity I was presented with, but still managed to salvage enough of the gain to at a minimum deliver market beating returns despite my letting greed get in the way.. And although I de-risked CENJF (sold 25% of my shares) in a more disciplined manner unfortunately it was at about the price it is at now as opposed to the 52 week high so for now at least it is a bit of a wash. I did scalp a little from trading some shares during some weakness earlier in the year when it fell to around $13 and considering it was a 30% position to begin the year and up 25.95 currently I’m certainly not complaining. Especially because I am as bullish going into next year as I was to begin the year. (I actually plan on buying back the shares I sold into any further weakness because I believe the fundamental story has improved a lot from when I sold them.)I’m not familiar enough with most of the other picks to have a strong opinion as to how I might have responded if I owned any of them but a few things do stand out. One is the risk/reward profiles where it appears to me that there is quite a bit of differences in the types of picks where one group is comprised of “moon shot’ type picks (much like my GUKYF) where the reward potentially could be mind boggling and somewhat safer (none of them are safe in reality) companies that might have great market beating return prospects (CENJF was like this for me) but weren’t likely to be 3 or 4 baggers anytime soon even if the stars aligned just right.Again because I don’t follow the other companies and because this is a rather small sample I may very well be wrong, but absent some pretty fancy explaining by the people who know the stories better, my little postmortem would indicate the picks aren’t the problem but rather a unwillingness to seize a 100% real opportunity vs. some hoped for bigger gain when it was presented.As I said in a previous post, even if I don’t share the same investment philosophy with my fellow Fools I can still gain a lot from them, but only if they share their experiences.B
The problem with this analysis, B, is that it is a retrospective pick of the exit point. For someone to have perfectly picked that point they would have to have a time machine. This isn't to say that one couldn't have booked *some* profit, but the contrast with holding would be far less dramatic. And, it would also mean holding a smaller amount of stock when and if they go back up again. The flip side is that dips are buying opportunities.One of the reasons for being leery of spending a lot of time in cash is that it is a sure loser position. Inflation *will* take away purchasing power, even if the absolute capital is preserved.
B,I think it's a great topic for discussion. My own slowly evolving philosophy is to "buy in thirds", which I've very much learned from the many posters on these boards, but to also attempt to go somewhat overweight as I'm buying in so that I can do some "selling in thirds" as a position vastly increases in value. That way I feel I can lock in some profits while still allowing a company I believe in to continue helping my portfolio. Rarely do I have much sitting in cash, as I find there are significantly more companies I'd like to own than I have in funds. I think another way of doing something similar is through use of options, which I'm trying to become more comfortable with, and again must thank TMF for what knowledge I have in that regard. Thanks for starting this conversation. ed
The problem with this analysis, B, is that it is a retrospective pick of the exit point. For someone to have perfectly picked that point they would have to have a time machine. Who said anything about picking the exit point retrospectively. I compared what the max opportunity was vs. the indices which is no different than looking at the results as they exist today.If I was trying to point out anything it was like Fuma102 stated "we are not as great as we all think". I already responded to him that I largely agree with him, primarily in my case at least, because even when we have success we can't be certain to what extent it is linked to our efforts or to what extent it is little more than dumb luck.My point in bringing the subject up is that because there is ultimately so much we can't be certain of it is imperative that we handle the few opportunities we are 100% certain about with the reverence they deserve.The data speaks for itself and you can choose to do with it what you will. What is obvious though, with this small data set anyone who chose to go with the belief that the future held even brighter (short term) prospects for whatever reason is now finding themselves thinking about what shoulda, coulda happened when they declined to book profits that were by any measure stunning short term results.I'm not making any claims about long term performance only pointing out how many opportunities have been lost within the NPI portfolio if people didn't look at stunning short term results and lock in at least some profits that they were absolutely guaranteed of making by what I think of as going agnostic about what might happen.This isn't just theoretical for me as my two largest positions in a portfolio that seldom exceeds many more than 10 positions are completely de-risked i.e. I have all of my initial investment off the table and they represent nearly 40% of my portfolio (Both owned less than two years)and have a couple others that I am well on my way to completely de-risking as well.This isn't to say I haven't had failures along the way, heck I owned ATPG which has pretty much gone to zero, but even then my de-risking efforts combined with a small position (pretty much had lost confidence in the company)kept my ultimate losses smaller than they could have been. One of the reasons for being leery of spending a lot of time in cash is that it is a sure loser position. Inflation *will* take away purchasing power, even if the absolute capital is preserved.I'm sorry but this is shear lunacy IMO. Sure what you say is correct technically, but allow me to pick on you personally for this example.On the one hand you correctly point out that sitting in cash due to inflation is a sure loser. (We will skip the point where you overlook that the purpose of the cash is to be available to invest in great risk/reward opportunities when they crop up)On the other hand you make a claim that I'm being retrospective when I point out that your pick MAKO offered you a "sure" 79% gain that is likely the equivalent of a decade of your "sure loser" inflation damage (I generously didn't include the 47.6% loss you have incurred since Jan 1 in my Calculation).What Fuma said bears repeating,"were not as great as we all think unfortunately"BPS For the record inflation is not a "sure" thing and no matter what you might think deflation does happen.
My own slowly evolving philosophy is to "buy in thirds", which I've very much learned from the many posters on these boards, but to also attempt to go somewhat overweight as I'm buying in so that I can do some "selling in thirds" as a position vastly increases in value. That way I feel I can lock in some profits while still allowing a company I believe in to continue helping my portfolio. Rarely do I have much sitting in cash, as I find there are significantly more companies I'd like to own than I have in funds. Except for the "not sitting in cash part" I have done a variation on this quite often. Unfortunately, all too often that first third position has been for what ultimately becomes a small position in a great company and the positions where I had the opportunity to add a second and third position I got to do so for cause. :<(I now try to take a much more individual approach to decide whether I should go large early and what price is required for me to take on that additional risk. I had a real world example of this in the last couple of months with Arcan Resources (Canadian) where I tried to explain my thinking over on the SD board (few inhabitants so we, OK mostly I, talk about anything.) As it turns out I ended taking a 10% position all at once a day or so later at $0.78, which knock on wood has traded as high as $1.40ish and I believe closed around $1.25 on Friday.http://boards.fool.com/94-cents-looks-even-more-enticing-but...Due to the fundamental news that broke I've upped my target a bit from $1.25 which would have left me with a de-risked position with an effective cost basis (my made up term) of $0.31 which would give me a kind of, sort of, 3 bagger on my remaining shares and still leave me somewhere around a 7 or 8% position within my overall portfolios.Believe me that target hasn't been raised a great deal. (not sure exactly what it is yet to be honest)But especially after my little look back on the NPI picks you can be certain that I am well aware that any pain I might feel by the share price continuing up after I reduced my position is nothing compared to what I would feel if I gave all back.Ain't happening!B
Who said anything about picking the exit point retrospectively. I compared what the max opportunity was vs. the indices which is no different than looking at the results as they exist today.My point is that the max possible gain is an illusory number that depends on perfect timing. Even a stock which just fluctuates around a stable trading range could be quite profitable with perfect timing.I don't dispute that being active offers much greater opportunities for loss than staying in cash, but I think it is worth remembering that cash is a sure loser. That may be perfectly acceptable. If someone has made a wad and is ready to retire and has enough money to last forever, then cash or equivalents is a reasonable strategy (even if boring).Yes, dry powder is good when opportunity comes along, but I don't think it can be used to justify 50% cash.
My point is that the max possible gain is an illusory number that depends on perfect timing.You inserted the "possible" not me, what I included in my post was not illusory it happened and although calling a "top" in a stocks price is not likely in most cases knowing that you have the opportunity to lock in a profit on any given day is, along with buying shares at that price, the only thing you can be absolutely positive about in the market. (Assuming sufficient liquidity and excepting the few minor trading issues that might change a price in a minor way.)I think it is worth remembering that cash is a sure loser.You can repeat this as often as you like and it won't make it anymore accurate. Inflation isn't a "sure" thing and deflation can happen which would make cash a winner.Yes, dry powder is good when opportunity comes along, but I don't think it can be used to justify 50% cash.Sorry but unless you know the types of investments held in a portfolio, the strategy being deployed and the investors goals this is just an example of the type of Wall street wisdom that gets investors in so much trouble IMO.Let's assume you're just a typical investor who isn't shooting for the moon and would be giddy to consistently earn 6% per year as you work your way towards retirement. Further let's assume that for some reason, really doesn't matter why, your portfolio catches fire and goes up 40% in a six month period. Lastly as the final kicker let's assume that the market has been on a four or five year winning streak.Now in this scenario you have just managed to meet your goal for slightly more than six and a half years in six months and although you can't be certain you also know the longer the market has been going up that the odds of it going down are likely increasing.Can't justify 50% cash? Personally if your goals actually mean anything to you I don't see how you could justify anything else.cash or equivalents is a reasonable strategy (even if boring).LOL, to each his own I guess. Personally nothing quite gets my adrenaline going like a crashing market, watching fully invested investors nearly wetting their pants as I sit with a wad of cash drooling over the potential opportunities. Nope not boring at all. :<)B
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