A reader commented on yesterday’s post, paraphrasing David Swensen, that “selling into weakness (ie panicking) is the biggest sin.” I can’t vouch for Swensen’s belief but assuming the reader is correct…

What about selling your losers and letting your winners run? Did William O’Neill come up with the 8% stop order? I’m thinking he had something sound in mind. Isn’t every stop that has ever been executed been a sale on weakness?

On the other hand “no one ever went broke taking profits.” We should buy when there is blood in the streets, we should buy when stocks are on sale.

Either camp (sell strength or sell weakness) can cherry pick thousands of examples to make their case but there is no way to know which is right except in hindsight. If a stock goes from $30 to $20 in a panic what it does next would just be a guess. If it goes to $10 then selling at $20 was the correct trade and if it goes right back to $30 a $20 sale was the wrong trade. Both examples exist.

Some people seem to be militantly devoted to one or the other and I have never understood this. The people who use 8% stops on everything got whipsawed hard this summer.

Can anyone say that the person who “panicked” out of the market during the first week of 2001 at the low of 1274 (this can been seen better by clicking on the chart) made a bad decision? Sure they would have done better to sell a week later but that misses the forest for the trees.

Either method can be articulately defended and either one can be easily refuted with plenty of examples.

I have sold into both weakness and strength and have been right with both methods and wrong with both. Going forward I will sell with both methods and again will be both right and wrong with each one. If you choose just one method you will get some right and some wrong, ditto if you go with both.

So is there a right answer? I don’t think so. I have written many times about not being married to either side and that works for me. You obviously have to do what works for you, more specifically what lets you sleep at night.

Last 5 posts by Roger Nusbaum

• The Big Picture for the Week of November 15, 2009 - November 14th, 2009
• Process Drilldown - October 23rd, 2009
• Sunday Morning Coffee 10-18-09 - October 18th, 2009
• A Little Followup From This Morning - October 8th, 2009
• Wednesday Roundup - October 7th, 2009