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I am relatively new to T.M.F. and before becoming a member I would typically use a version of momentum trading. When I traded, I would use a tight trailing stop loss of approximately 3 to 5 %. My thoughts are that the majority of people do not use such a tight exit strategy. Because I am relatively new here, and because I would like to clearly understand typical exit strategies used by others in this group along with their reasoning behind their strategies. Any information and/or suggestions are welcome.


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DIYer, here at TMF, we generally embrace a long term buy-and-hold investing philosophy, so our exit strategy is usually to avoid it if possible. Being focused on investing in companies rather than market trading stocks, we look to how the business is performing operationally rather than how the price is moving in the market.

Our thoughts on trailing stop losses are that it artificially limits the potential of a position to grow. Even the best companies have bad market days as short term thinkers react to the news of the day rather than focusing on the future potential the company offers. A great example from my investment history is Netflix.

I first bought Netflix back in 2007. I had an 8 bagger percolating when the company announced a rate increase and the spin-off of the DVD-by-Mail business into the ill fated Qwikster. There was a mass exodus by subscribers and shareholders, dropping the stock price by half nearly overnight. Within six months, the subscribership returned and I added to my position before the near-term thinking market noticed.

Eight years later, my position was now a 48 bagger. Had I used a trailing stop loss, I would have lost out of over 90% of that growth in my portfolio. To my way of thinking, it's using a fear of market movements to drive investment decisions rather than letting the business performance inform my choices. The same goes for selling a successful investment prematurely and missing out of continued growth. Don't be afraid to let winners win and give perceived losers the opportunity to prove the market wrong.

When to sell is one of the hardest questions to answer. Ideally, Fools have an idea when they would sell before they open a position, but a company's road can have many twists and turns. Fools try to not make emotional decisions, but that can be difficult when you've given a company every opportunity to fulfill its promise - you hate to give up on it but you're tired of being burned by it. Or it's been a tireless performer and you hate to limit its potential.

Here's a great Fool School article discussing when to sell:

For me, if the investment thesis no longer remains intact, that's a good reason to sell, but if the company is performing operationally but that just isn't being recognized by the market, I might tend to be patient and give it more time. Or, if a strong performer reaches 10% of my total portfolio, I'll trim it as a matter of fact because I don't want my portfolio to become too concentrated in a single position. In the absence of one of those two events, I tend to hold for the long term.

Bottom line, I recommend not over-thinking it. Try creating a Sell Watch List (just like a Buy watch list), where you rank your positions from least conviction to highest conviction and the companies that are lowest on your list are the ones you are most comfortable dropping. That way if you're in a position where you want or need to sell, you have your research already started.

Who has a number of long term investments that aren't doing much now but for which he still holds high conviction that their stories will play out in his favor...

Ticker Guide for The Walt Disney Company (DIS), Intuit (INTU), CME Group (CME), MongoDB (MDB), TripAdvisor (TRIP), Live Nation (LYV), Vivendi SA (VIVHY)
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