With my professional experience in the market and formal education about investment management, it’s difficult for me to classify myself as a retail investor even though I am no longer affiliated with any firm that manages money. In the last 5 trading sessions or so, I wished desperately that I could call myself a retail trader so that I would be able to take some credit (although I did nothing) for once in a lifetime market event. GameStop, Corp. (GME) stock, led by an army of retail investors who got together on Wallsrteetbets, turned the tables upside down forcing a few renowned hedge funds to throw in the towel and book billions of dollars in losses. This, if you ask me, is the strangest market event that I have ever come across. Not even in my wildest dreams did I think a group of retail investors would be able to drive such a massive market movement, but here we are.
Now, the most important question as an existing GameStop investor is (I am not), when is the right time to sell and book the profits? Keep on reading as I walk you through a time tested strategy.
There are many reasons to sell a stock. For GameStop, there can only be a few
For a dividend investor, the possibility of a dividend cut in one of his holdings would be the biggest reason to sell. For a growth investor, it could be an indication that a company he owns is about to mature in the foreseeable future. For a media-driven hype stock such as GameStop, the right time to sell is when it is apparent that a continuation of this hype is not realistic.
Let’s dig deeper.
I write for many leading financial publications and often my research is backed by data, charts, graphs, and whatnot. Today, however, I only need to remind our readers how to be (Wall) street smart. There is no doubt about the fact that the GameStop rally was orchestrated by retail traders. This means that at a certain price point, the demand for GameStop stock is bound to decline sharply as retail investors are unlikely to bet on a company with a very high price per share. From the price movements during the last week, it was apparent that buy orders dried up considerably every time GME stock tried to break through the $350 mark, so I believe investors should eye an exit around that price if their average cost is not in the double digits.
For investors who bought the stock at much lower prices, only one rule should dictate their decision-making process: the risk-reward profile. For instance, if you are sitting on a return of say $100K, does it have a higher utility for you today than let’s say $150k you could make if you hold on to the stock, whereas the downside would be $50k? In case you determine that risking another $50K to make an additional $50k is not worth enough, then you have the answer to the all-important question of when to sell GME stock.
All over the internet, I have come across retail investors reminding their fellow investors/traders to hold on to GameStop stock indefinitely in the hopes of making even more money. This, unfortunately, is bad advice. To quote Warren Buffett, the market is a voting machine in the short term but a weighing machine in the long run, meaning GameStop will have to come up with stellar earnings consistently for this rally to extend in the foreseeable future. This, if you ask me, is wishful thinking.
Retail investors have truly changed the playing field once and for all, and I sincerely hope they will have the understanding to exit their investments wisely by booking handsome returns rather than being forced to sell their stock at a much lower price in the future.
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