How do you know when to sell?
I pitched GoodRx in a L/S interview in May 2021 somewhere around $30-$35 / share (see price chart). By October 2021, share price rose to a smidge under $50 / share. As of now, it is just a bit over $5 / share.
I am a PE guy. If I had actually made this trade, I would not have sold in October 2021. I probably would either (1) have sold when shares went back down to $35-$40ish (e.g., take a small winner while you still can), or (2) realistically might have simply held given my conviction in the business.
Don't fixate on GoodRx as a specific example because I know there were catalysts for share price to decline but please instead focus on the spirit of my question. How do you know when to sell? Are there rules of thumb for when to take winners, when to let them ride, when to cut losses? How does this work?
I am used to an environment where you buy once and then you only get another 1-2 chances to sell later and you have greater control over the price you are able to sell at, rather than simply being at the whims of the market.
Thank you in advance. I will give SBs to all serious comments.
This basically describes my methodology:
https://kellysalpha.substack.com/p/letting-your-winners-run-is-for-chum…
It depends on what you define as your investment style as well as the investment horizon. Some investors sell stock when they believe the fundamentals behind the business is changing for the worse. Some sell based on valuation (ie reversion to the mean). Systematic traders typically build trading systems based on data such as volatility, trade volume, asset correlations (derived from regression models), etc as market indicators of when to buy and sell. Discretionary macro folks buy and sell various asset classes based on the macro environment (ie the quads: Deflation, reflation, expansion/goldilocks, stagflation) in addition to speculation on central bank policy.
But besides these options, I would highly recommend you to read more on Howard Mark’s thoughts on Second-Level Thinking, which may give you some inspiration.
Run an IRR model and see if the Prospective IRR is attractive
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