@WFJ
I kind of do the 10% rule but I do it with covered calls. If the underlying blows past my strike, then I don't regret hitting max profit (at least not anymore, I did once miss out on huge upside with SQ that I think about occasionally lol) and deploying my capital elsewhere to ride the next wave. I usually do this with the stocks I'm heavily invested in so I can reduce cost-basis on potential disaster scenarios. I think our thinking is along the same lines here.
As the saying goes, selling your winners and holding your losers is like cutting the flowers and watering the weeds. The antidote to this problem is having a long-term investing horizon. I've several stocks I intended to "hold forever" that I ended up just taking the capital gains on. Had I held, I'd arguably been in a much better financial position - AMD especially was 50% of my portfolio at one point, SQ, MSFT (bought back in). On the other hand, not taking profits and watching the underlying fall and trying to average down your cost basis may put you in a catching the falling knife scenario - and then you will wonder why you were so greedy before. It is a bit of a catch-22.
In the end, sometimes its best to just never regret taking profits. For several reasons, I think this is a rational thing to do in a volatile market where a headline on what the Fed is up to or what the mass media thinks about COVID this week can send stocks into a frenzy. Stocks are so cyclical at the moment that you can always just buy back into your "forever" positions when a new support is reached. For instance, right now I'm waiting for AMD to drop back down to $135 which is where I sold it last due to a covered call (I had a $100 cost basis). Edit: Want to mention, the choice of $135 here is anchoring bias now that I think about it - to clarify, basically you want to buy back in after a short-term selloff.
One reason is that innovation is faster nowadays then it was before. A good solid blue-chip can suddenly find itself in a vulnerable position and potentially outmaneuvered by the new tech startup that has the sudden backing of multiple venture capitalist / billionaires. I think that is one of the reasons (besides quarterly reports) that professional money managers are also having a hard time letting their winners run as well. In the information age, the retail investors get the information just as fast. Seeing companies with Price to Sales ratios 10x over their peers but with better stock performance is completely irrational but it is what it is. Everyone has the next Apple/TSLA at their finger tips supposedly (See:
https://en.wikipedia.org/wiki/Rivian).
Second, while I think this advice about letting the winners ride is wise, I've also seen too much opportunity these past few years to ride momentum into a short-term trend and then jump out (yes - timing the forbidden word
). For example, COVID crash was perfect to go ride the tech stocks. It was obvious in hindsight and that is what I personally did (I should've not danced in and out of AMD though in hindsight, would've had a 3x bagger without the capital gains). I think Jason before he left the ERE boards hit a 5 bagger on Zoom
.
Third - It is an easier time then ever to time sector rotations. For instance, I noticed that FinTech has taken a beating the past two weeks (Paypal, SQ, Visa, SOFI, etc.) so I did the contrarian thing and start selling puts on the way down on Visa and SOFI. I'm in the red at the moment (timing is not perfect) but my conviction is that these will turn around. Timing never has to be perfect - you just have to control your emotion to hold through the recovery. Position sizing is important in this regard. Don't do this on stocks you don't want to be stuck with, otherwise you will crack (my lesson learned on a horrible trade with Moderna). You know when you see a sector rotation when a stock is falling and all its peers are falling as well with no good reason. You will know when support starts hitting when you get a green day or 2 with most of the family members. Now we're seeing inflation data.... so I am starting to heavily pile into inflation hedged positions (VISA, WMT).
Fourth - Watching one industry is generally a good idea. To develop some expertise in the actual business but also in how the family of stocks move. Find your darlings (hot growth stocks), quiet kids (reasonably valued), and your boomers ("recession proof" blue-chips that typically have a dividend). In semi-conductors, your darlings would be AMD & NVIDIA. Boomer would be Intel. The quiet kid is Micro Technology MU. Not necessarily a new company, but one that is looking reasonably valued compared to peers and it starting to get chatter online. Notice where the trends are at for everyone in the group. Sometimes money flows in and out of family members. When times are getting hard, we turn to the old wise member of the family (boomer). When there is a party for the celebration of the running of the bulls, we hang out with AMD. When we're volatile or quiet, the middle child is usually a good bet while the party-goers are having a hangover.
An example today would be how AMD has had its bull-run recently with a strong quarterly report so what will probably happen now is it will consolidate, sell off a bit, and trade relatively sideways for a bit before its next revelation. But AMD having a blast of a party should be a good hint that other semi-conductors will have a good party as well - Micron Technology has its quarterly report coming up. So I invested heavy into them and my expectation is the run-up will start before earnings about a month out. They're also valued cheaply compared to its peers (AMD / NVIDIA) but not as cheap as Intel. Intel will suddenly come in favor again when the growth spigot is turned off, the headlines start spelling out recession, and money flows from growth to value.
Some of this could sound slightly irrational - part of trading is understanding behavioral finance and your own emotions. You don't have to be perfect...
You only have to be right "60% of the time" - Peter Lynch