Decisions, decisions. In the stock market you have to make them, never being sure if they’re right or wrong. Anyway, I sold my holding of specialty finance company REDD (Redde) today.
I bought it in Jan 2014 when it was called HHR, at a price of 5.753p. Adjusted for consolidation, it’s 57.53p. I see from my notes that I put a FV of £420m on the company, with a reference to my blog (http://is.gd/DccgYZ). It was a Magic Formula stock. The shares are currently worth around £460m. Blimey. The system works!
I had actually lost track of my original decision, so it was good to refresh my memory. REDD became a momentum share, which is when I kind of got sloppy in my thinking. I just let the momentum run.
Momentum investing is something I have been thinking about lately. I am firmly convinced that if you play momentum, you are going to need an exit strategy. I had used PV50 (price vs 50dMA) in the past, and it stopped me out of EZJ too early.
The problem as I see it is that PV50 is often an area of support, so if it dips below that figure, what do you do? Is it a sell, or actually a buy? At what point do you say that momentum is broken?
I now have a different strategy, which worked well on my recent sale of APH. It is very simple: a percentage of the 52w high. That way, you can allow shares to pull back or consolidate without losing your position. On APH I set it at 20% below the 52w high.
On reflection, I figured that 20% was too loose, so I set it at 15% for REDD. The stop was triggered today, so I bailed.
Let’s take a look at the chart:
You can see that there’s a consolidation area at around 160p. It then ran up to 180p, which proved to be level of resistance. With today’s price moves, you can see that the 160p area has been broken.
By my reckoning, the next support level is at around 140p. It looks like that’s where it is heading next. My sale today certainly wouldn’t have helped!
It occurs to me that if you are going to set target prices, then don’t set round numbers. 160p is very obvious as a consolidation region. Suppose you set your stoploss at 160p, and it gets hit. You’ll quit the trade, but how do you know it’s not an area of support, and the shares won’t bounce back up again? It looks like every man and his dog has configured their software to trigger an alert at 160p. In which case, it’s difficult to figure out what to do. That’s why I like a stoploss based on the 52w. It gives goofy numbers, making them harder to predict, which is what you want.
So, in summary, I was in at 57.5p, and out at 153.5p, including all transaction costs. Dividends are ignored. That’s a gain of 167% over a little less than two years. Come to daddy!
I am relieved to get out, in a way, as my holding was top-heavy. People might have suggested top-slicing. I’m not sure I’m a fan of that, though. If a trade is good, then why top-slice? If a trade is bad, then get out.
It will be a long time before I repeat the success of that trade. I do have a winner that it up more than that, but I consider it a long term buy and hold, and I don’t want to start getting too clever with it.