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Exit Strategies

by Lobo Tiggre
Monday, December 10, 03:16pm, UTC, 2018

An astute reader asked me about exit strategies going forward, specifically in light of the lack of one during the 2011 peak for resource stocks. That may seem like a problem for another day—a day that may seem far distant while resource markets are still down. But it’s good to think ahead.

First, let me say that when investors speak of exit strategies, they usually mean as regards individual long-term investments. I suppose one could say that a day trader has an exit strategy. But that time horizon is measured in hours or minutes. It’s really just implementing the short-term trading strategy. More generally, the idea is to consider how to get out of a substantial investment before getting in.

Here are some considerations I keep in mind as a junior resource stock speculator:

  • As a rule, I don’t buy into private companies. Sure, if I could get in on a seed cheap round, I could make a lot of money selling into the market once the company’s stock starts trading. But if things turn south before the company goes public, there’s basically no exit.
     
  • Sometimes I’m invited to a private deal in which the company promises to go public within a few months. I have not made a record of these, so I don’t have a documentable number for you, but my sense is that the timing is almost never as promised. It often takes far, far longer than expected—and sometimes doesn’t happen at all.
     
  • I don’t buy stocks in companies that have so little trading volume I could never get out in a hurry if I needed to. Stocks that trade only a few thousand shares—and even that not every day—are non-starters for me. If I want to buy 10,000 shares, I want to see regular volume of at the very least 100,000 shares per day. The more volume, the better.
     
  • Buying into a private placement, I don’t look to sell as soon as the shares come free trading. That would imply that I don’t believe in the company, but just want the warrant in case it gets lucky. I know this is a common exit strategy, but I don’t want to invest in any companies I don’t believe in. As long as the company is delivering, I’ll hold the stock with a trailing stop loss (TSL). This way I only exit if things go against me, and I hold on to the warrant in case the company recovers and then goes on to success.
     
  • Generally, I look to exit when the company achieves—or fails to achieve—whatever it set out to do that I speculated on.
    • If it’s a pre-production sweet spot (PPSS) play, I look to sell, take profits, or put a TSL on it when it achieves First Pour.
    • If it’s an exploration play I think will surprise the market with a large first-pass resource estimate, I look to exit when that resource is published (unless the company gives me a new basis for speculation at that time).
    • If it’s a producer that I think will surprise the market with better-than-expected output and profit, I’d look to exit when the company delivers that profit.
    • If it’s an early-stage exploration play, I’d look to exit after the discovery, should it be so lucky as to make one. (I might look to buy back in again when it becomes a PPSS play.)
  • Generally, I don’t just sell when it’s time to exit, unless there’s an urgent reason to. Putting a TSL on the stock achieves the same result, but lets me lock in greater gains if the stock keeps rising after my exit conditions are met. Note that this is different from trying to use stop losses to mitigate the risk of my resource speculations. That rarely works; they’re just too volatile. But once I’ve decided to sell, it does no harm if volatility triggers my TSL—I was going to sell anyway.
     
  • I don’t have any fixed number for exit strategies, like selling when I get 2x, 5x, or 10x return on my investment. But I will put a TSL on any big wins like that. And the more overvalued the stock becomes, the less forgiving the TSL.
     
  • The one exit strategy I always employ is to get out when the speculation fails. Taking losses at such times hurts, for sure. But in my experience, failing to take them immediately almost always makes the losses worse. I will give a company a second chance if it seems to have fixed whatever the problem is—but I don’t want to hold while that’s getting sorted out. I want out. If I buy back in again, I think of it as a new speculation based on new circumstances.

So, one way to look at an exit strategy for the next resource market peak is simply to apply whatever exit strategies you adopt for individual speculations very consistently as you go. That locks in profits as you go, so you don’t have to worry about timing the perfect time to exit the market as a whole.

After that, it gets murky. Exiting an entire market implies calling a top. Few people can do that except in hindsight. Consider the Bitcoin (BTC) craze of 2017. By September, BTC was up 5x for the year. A good time to exit? Maybe, but it doubled again by November. That was surely the time to sell, right? But it almost doubled again a month later. No one could have said in January that the right time to sell was when BTC hit 19x for the year.

But this I can say: when things go from being undervalued contrarian speculations to overvalued popular picks, it’s a good time to look to make more exits than entries.
 

As always: caveat emptor.

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