Stock Trading - Entry 26

This article is all about my thoughts on having an exit strategy when buying stocks. Again, this is not financial advice; it is only my personal thoughts on the subject that I am applying to my wealth-building journey. Exit strategy. Mucho importante. Extremely important.

A quick historical example of this would be Japan. Very big difference about how they annexed Manchuria in the late 1800s where neither China nor Russia could effect a response and then Japan sued for peace (they stopped the war in way that the others agreed to stop, too). That meant they could keep their gains. Fast forward to World War II when sage advice on not to attack certain places was ignored by Japanese decision-makers then and, well, their exit strategy was to fight even bigger foes - and we all know how that turned out.

Good exit strategy = keep your gains. Bad exit strategy = lose almost everything.

Newsflash #16: Before you enter, plan your exit - or at least be aware of it.

In geo-politics, exit strategies can be determined and selected in advance. But does it apply when investing in stocks, in other words, calculating when to sell?

In an earlier article, I spoke about giving myself a two- or even three-year window to analyse things with historical data to make my moves then. I can honestly say, that is working when I take a quarterly peek at the investment funds (not stocks) I have invested in and compare them against each other (ETF, securities, and market-linked GICs). With non-dividend-paying stocks, I have found out it doesn't entirely work out that way. Could I buy and forget? Sure, but something has been nagging at me for a year in this regard. Well, I had to put my finger on it with the GIVX announcement I mentioned in my previous article.

The basic question I faced was whether to wait and see if that deal was permitted to go through or sell while the stock was just three pennies off the buyout price. The only two pieces of advice I had that could apply were 'patience is a virtue' and 'a bird in the hand is worth two in the bush'. In other words, wait for possibly three cents more with the risk of a stock price dive if it didn't or cash out and let other opportunities make up for the three cents (event though I was well in the black at this point anyway). There were other opportunities plus GIVX had been fluctuating up to and then slightly under $1 per share by the end of summer before this announcement.

So, 'a bird in the hand...' approach won out. But it wasn't chosen prior to my purchase of those shares. And the approach worked as I was able to buy several shares in several companies during a price dip. How could I have planned for that in advance? Since there was no way I could have predicted that (including through the use of an animal to pick stocks), I couldn't.

This requires an acknowledgement of two things. First, I have to review stocks on a semi-regular basis to identify possible exit strategies. This means more work for me, which I would like to keep on the low side since I don't want to be glued in front of my computer doing analyses all day long - which I chose at the very beginning of my stock trading. Second, I have to buy stocks in such a way that it is easy for them to keep me in the black. This validates the approach I have been taking since the beginning when I only had $360 to invest.

When it came to dividend-paying stocks, I now also have the option of treating them like a savings account because they pay me the equivalent of interest from a savings account via dividends. The company has to remain solvent and maintain a decent (but not perfect) track record of decisions and opportunities for growth potential.

This brings me to my purchase of Vecima Networks in autumn 2024. Trading around $20 at the time, it hasn't seen a big dip recently for me to buy low. It is however, making great strides and acquiring some great, complementary tech from Casa Systems, a firm that was on the cutting edge yet couldn't make it, as well as acquire a company that has automated software testing. (Can you say smoother ops?)

What prompted that was the recognition that my purchase of Total Telecom (TTZ) did not factor in the company too non-chalantly expecting sales to remain high and when they didn't, bang, the market punished poor performance via a dive in the stock price. There is a lot going on in the remote asset monitoring world, so TTZ only needs a couple good deals to rebound, but the non-chalant and seemingly blind sales-based attitude has me questioning the board to the point where I will want to sell when the market rewards them (by boosting the share price in response to an improved sales record, acquiring new and better tech, or both). Since that isn't happening now, I wanted to diversify in the field - hence my drive to get in on Vecima Networks.

Going from stocks with a $1 share price to those with a whopping $20 share price means there is a lot more space for me to lose money between $0 and $20 should the stock tank compared to the distance between $0 and $1. The company itself needs to fill that void. Drivers, tech, and context will push a price up, but to maintain a share price, that's the company itself. What satisfied this for me with Vecima was analysts saying it is hugely undervalued (at the time of publishing). This meant I didn't need to dive into researching every single aspect of the company because the stock price doesn't seem to reflect the company's full value, making it very easy for Vecima to hold its own with almost any decision made. (Of course I did some research.) Combine that with a solid record, recent tech acquisitions, and they pay dividends...made it a buy decision for me.

But wait; what was my exit strategy? Same as before, make it easy to stay in the black and decide when to cash out later. Effectively, no precise exit strategy.

I pride myself on being a strategic thinker and yet all I seem to manage to do is to apply that to find a decent entry point. Don't get me wrong, I appreciate that, but it's the exit strategy that matters in terms of wealth-building.

While this may sound defeatist, I found another stock to get me thinking on exit strategies, Payfare. While they don't pay dividends, the gig economy is booming, Payfare is both undervalued with strong cash reserves, and they have their fingers in a lot of pies. So I bought with the intent to sell after it rebounds. Given the recent dip was caused by DoorDash using an alternative, that means investors who had this stock seem to chase trending fads (and sell stocks along the same lines). What spurs the eventual rebound of Payfare stock price and what type of investor responds to such a spur will be interesting to see, but I am not sure that question will make it on my list of questions in my fundamental analysis. We'll see.

In short, I would say that when it comes to investing, be aware of your exit strategy or at least create a positive context for it. Also, if the value of one of your stock holdings decreases due to a price difference, you haven't lost money. Why not? Because you haven't sold it yet.

Newsflash #17: You only lose wealth in your portfolio when you actually click 'sell' at a price lower than what you bought (net of any tax implications). So don't beat yourself up unless this happens - and not even then. For me, I am not going to kick myself if TTZ, FE, and JUMP turn out to be losses for me and I say that because they are all trading way below the price I bought them. I have made money elsewhere to more than cover potential losses on these stocks. Plus, if I sell those shares at a loss or am forced to write them off as total losses, I will look at why they failed at that point and learn my lesson then because I can't predict what that lesson will be. In the meantime, my three current under-performers are still motoring on, so their performance may improve. As a result, any anxiety I have now about my underperforming stocks I will channel into me likely holding off on investments in similar sectors/niches until I learn what I need to learn to be comfortable investing in those sectors/niches.

So I guess that leads me to one other thing regarding exit strategies and stock trading. Newsflash #18: Channel your anxiety so you become risk-avoidant with the exclusive goal of waiting to learn what you need to learn, not for any other reason. Be active and honest about the learning, though; don't go passive and switch off indefinitely.

It seems I have set myself up to generate some insights into exit strategies in my stock purchases. That and some wealth.

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