November 8, 2006 –
Here in my blog and in my newsletter, I have mentioned Sothebys (NYSE:BID) as a favorite of mine a couple of times. Yesterday I sold out of BID for a 33% gain after holding it for about five months. There are a couple of important lessons to take away from my strategy regarding BID.
Number one, above all, always lock in profits. Normally once I’m holding on to a stock that is sitting on 20% gains, I usually put trailing stop losses of 15% on the stock. That way, my stop loss moves higher if the stock moves higher and I never have to think about making a decision to sell the stock because any price movement below the trailing stop price triggers an automatic sell. Number two, once a stock I’m holding moves above a 35% gain, I normally tighten the trailing stop loss to 5% to further tighten my gains. When a stock I’m holding rises above 50% gains, as is the case with many a handful of stocks I’m holding right now, depending on the volatility of the asset class, again I normally employ 5% to 15% trailing stop losses again. And when a stock I’m holding rises above 100% gains, I consider selling half of my position.
Note that above I use the word “normally”. This is because different types of stocks require different rules, and there are always exceptions to these rules. With Sotheby’s after the stock moved beyond a 20% gain for me, I changed my stop loss from a standard 15% stop loss to a 15% trailing stop loss. Then this week, after it moved higher for a 38% gain, I tightened my trailing stop loss from 15% to 5%. This was an important move because the stock at one point yesterday was down 9%!
But no worries, because once it passed through my 5% trailing stop, my stock automatically sold and locked in a 33% gain for me. Number three might be the most important and most neglected point of all. If everything is still in place regarding the stock that made you buy it in the first place, consider buying it back at the right price in the future. Most people that employ stop losses forget about a stock once they sell it.
Regarding Sotheby’s, the reason I purchased it in the first place less than five months ago was because of a bull market in fine art. Well, the bull market in fine art is still very much alive and all of the reasons for its boom will, I believe, remain in place throughout next year. That means nothing has changed regarding why I purchased Sotheby’s in the first place.
So why did it dip by more than 9% at one point yesterday?
Merely due to the fact that it’s had such a solid run recently and was due for a correction. No stock shoots straight upward without periods of correction and consolidation. Also two major investment firms, due to Sotheby’s rapid price appreciation as of late, downgraded the stock yesterday from outperform to perform and from buy to hold. Surely that also contributed to the plunge in share price yesterday as the thundering sheep herd almost always follow firms’ upgrades and downgrades blindly.
However, at the right price, I’ll be looking to re-establish a position in BID again.
