Day 6: Resilient Exit/Recovery – Agile Approach
Now, let’s talk about resilient exit and recovery Agile-style strategies when and how you can spot stock resistance levels [1,87]. Here are a few of the scenarios when you should sell your stocks:
1. When the fundamental of the stock degrades like the declining profits, competitors are doing way better, NPA start increasing at a high rate, etc.;
2. When the company becomes overvalued in short time (e.g. when the share price will go too high compared to the entry price);
3. When you find a better stock (go for a company whose fundamentals are better than your current stock).
But what about investment recovery (IR)? Investment recovery is the process of recouping the value of unused or end of life assets [1]. This includes idle asset identification, asset redeployment, and divestment. In fact, unused assets depreciate in value and result in an actual expense on the books. In order for an asset to be reused internally, another part of the portfolio needs to have a need for an asset of that type. Divestment is effectively the opposite of an investment and is usually done when that asset is not performing up to expectations [1].
The key question is as follows: how long will it take for my investments to recover? The IR calculators [88] can help you find out how long it will take for your investment to recover its value after a market downturn and identify how long it will take to get back on track to reach your original goal:
Table 16: Example of IR calculation
|
What your investment was worth on 01/2020 |
25000$ |
|
Expected yearly investment return |
5% |
|
What your investment is worth today |
10000$ |
|
What are your contributions? |
0$ |
|
Expected inflation rate |
1% |
Results: Adjusted for inflation, your original investment of $25,000.00 will be recovered within 25 years.
Finally, let’s quantify the exit and IR Agile monitoring strategies using the average true range (ATR) indicator of market volatility developed by J. Welles Wilder [1]. ATR is a continuously plotted line usually kept below the main price chart window. The way to interpret the ATR is that the higher the ATR value, then the higher the level of volatility. Firstly, we calculate the True Range (TR) using the following three methods: (a) take the current high H and subtract the current low L, i.e. H-L; (b) take the absolute value |H-Cp| of the current high H minus the previous close Cp; (c) take the absolute value |L-Cp| of the current low L minus the previous close Cp. The TR represents the maximum value of these three residuals, viz.
TR = max {H-L, |H-Cp|, |L-Cp|}.
The ATR is the average
ATR = sum {TR(i=1-n)}/n
of daily values TR(i) for a given trading day i over the time period n involved. In practice, we analyse the percentage volatility (Vol) of a particular stock A [1]
Vol (A) % = ATR (A)/ $ A,
where $ A is stock price at the time.
ATR is often derived from the 14-day simple moving average of a series of TR indicators [89]:
[89]:
Current ATR = [(Prior ATR x 13) + Current TR] / 14,
where Current ATR is the current 14-day ATR based on daily data, Prior ATR is the previous 14-day ATR, and Current TR is the most recent day’s TR value. Because there must be a beginning, the first TR value is simply the High minus the Low (H-L), and the first 14-day ATR is the average of the daily TR values for the last 14 days. As suggested above, the ATR should be converted to a percentage Vol % so that the ATR of different stocks can be compared on the same scale.
Let’s consider a trailing stop loss order that adjusts the stop price at a fixed percent or number of points below or above the market price of a stock. You can use the ATR to figure out where to put your trailing stop loss. This is a way to exit a trade if the asset price moves against you [90]. A rule of thumb is to multiply the ATR by two to determine a reasonable stop loss point. So if you're buying a stock, you might place a stop loss at a level twice the ATR below the entry price. If you're shorting a stock, you would place a stop loss at a level twice the ATR above the entry price. For example, say you take a long trade at $10 and the ATR is $0.10. You would place a stop loss at $9.80 (2 * $0.10 below $10). The price rises to $10.20, and the ATR remains at $0.10. The trailing stop loss is now moved up to $10.
ReplyDeleteIn addition to conservative buy-and-hold strategies, Agile investors (long-term winners) always foresee early warning signs [1] to develop and implement multiple resilient exit/recovery mechanisms. It is very important to know both how/when to enter and exit a stock. This is also the right placeholder to develop an effective investment recovery plan to optimize internal redeployment of your portfolio. How can you recover maximum value from the idle/surplus assets? A solid plan may include addressing identification, audits, sales, transfers or closures of your securities [72].
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