No matter how much time, effort, and money you put into an investment, if you don't have a predetermined exit strategy, everything can be gone. For this reason, investment guru never invests without knowing when to withdraw. Buffett and Soros have clear exit rules. Their exit strategies stem from their investment criteria.
01 Buffett constantly uses the criteria he uses to invest in measuring the quality of the companies he has invested in. Although his most respected holding period is “forever”, if one of his stocks no longer meets one of his investment criteria, he will sell it (for example, the economic characteristics of the company have changed and the management has lost their direction,or the company lost its "moat").
In 2000, Berkshire's dealings with the US Securities and Exchange Commission revealed that it had sold a large portion of its Disney shares. At the 2002 Berkshire Annual Meeting, a shareholder asked Buffett why he wanted to sell the stock. Never commenting on his investment is Buffett's principle, so he vaguely replied: "We have a view of the company's competitive characteristics, and now this view has changed."
Undoubtedly, Disney has lost its main direction. It is no longer the one that made the timeless classics like Snow White and the Seven Dwarfs. The hobby of its CEO, Michael Eisner, must have made Buffett feel uneasy.
Disney spent a lot of money on the Internet boom, putting a lot of money into sites like the Goto.com search engine and buying companies that lost money like search.com. It is obvious why Disney is no longer in line with Buffett's standards.
When Buffett needs to raise money for better investment opportunities, he will also sell some of the assets at hand. This was inevitable in the early days of his career, because at that time his idea was more than money. But now, he no longer has to do this. After Berkshire’s insurance financing brought him enough money, he faced a diametrically opposite problem: more money than the idea. His other exit rule is: If he realizes that he made a mistake and realized that he should not make such an investment at all, he would not hesitate to withdraw.
02 Like Buffett, Soros also has a clear exit rule, and these rules are directly related to his investment criteria. He will clear the position when his assumptions become reality, like the attack on the pound in 1992. When the market proves that his assumptions are no longer valid, he will accept the loss.
Moreover, once its own capital is in danger, Soros will certainly retreat in time. The best example of this is that he sold his S&P 500 futures long position in a 1987 stock market crash. This is also the extreme case where the market proves that he made a mistake.
Regardless of the method, every successful investor, like Buffett and Soros, knows what kind of situation will lead to profit or loss when investing. With his own investment criteria to constantly assess the progress of the investment, he will know when he should honor the profits or accept the losses.
03 At the time of the exit, Buffett, Soros and other successful investors will adopt one or more of the following six strategies:
- When the investment object no longer meets the standard. For example, Buffett sells Disney stock.
- When an event expected by their system occurs. Some investments are based on the assumption that certain events will occur. Soros assumes that the pound will depreciate as an example. When the pound was kicked out of the European exchange rate mechanism, it was the time when he quit.
- When the goals set by their system are reached. Some investment systems set the target price of an investment, which is the exit price. This is a feature of Benjamin Graham's Law. Graham's approach is to buy stocks that are well below their intrinsic value and then sell them when their prices return to value (or when there is still no return value after two or three years).
- System signal. This method is mainly used by technical analysis traders. Their sales signals may be derived from specific technical charts, volume or volatility indicators, or other technical indicators.
- Mechanical law. For example, set a stop loss point that is 10% lower than the buying price or use a trailing stop loss point (which is raised when the price rises and remains the same when the price falls) to lock in the profit. Mechanical rules are most often adopted by successful investors or traders who follow refined algorithms, which are derived from investors' risk control and fund management strategies.
- Recognizing that you made a mistake. Recognizing and correcting mistakes is the key to successful investment.
Investors with imperfect investment standards or no investment criteria are clearly unable to adopt an exit strategy because he has no way of judging whether an investment object still meets his criteria. In addition, he will not be aware of his mistakes when he made a mistake.