A story about the Dot Com bubble, some profit taking, exit strategies and money vs capital

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by mcjanzton

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In the late 90’s we had a similar Tech/Digital stock rally (this is not nearly as bad though, so chill, companies are actually destroying the estimates and profits are strong).

Back then it was web page development and internet providers, now it’s mainly electric vehicles and some parts of tech.

“St0nks” were only going up, up and up. You heard things like – Dude, its a new economy, this is the new normal. This is the future, you can’t use old models to define value. Die all boomers and burn traditional stocks (ok I might be exaggerating on this one).

Anyway, I was a finance major at a prominent university in London, UK. I was destined for greatness and a trainee spot at Deutsche Bank’s analyst desk. My friend – let’s call him Eli, because his name was actually Eli – was a stock genius.

Everybody is a genious in a bull market, you put some money in to a company in IT and BAM, the new Buffett (or Cathie).

Eli was good for about 350kUSD at one point, not bad for a student. Or I should say, 350kUSD nominal value in stocks. Because, its not money until you sell. Eli learned the hard way.

The “dip” came. Eli figured “st0nks only go up” – I’m gonna “buy the dip”. The dip became a slide, then a vortex and finally evolving in to a capital sucking black hole (not an anus ok).

Eli bought and bought, he also had a debt position of about 25% of his portfolio. This increased to 50%. The bank called, Hey Eli – that collateral isn’t so hot anymore, pay up dude. Eli paid up. One year later he had -13kUSD on his account for accrued interest rates and trading fees.

So what’s there to learn. Well, depends on how risk averse you are, but I see a lot of new investors that ask about when and how to take home profits. There is no rule or best practice, but here’s at least an strategy that I’m using myself.

  1. I don’t let a stock grow beyond 20% of my portolio, if it does I automatically start scaling back profits and weight to other, new opportunities.

Compound that interest, bitch.

  1. I always keep a 10-15% cash position so I can take advantage on dips or other opportunities. This capital has had a ridiculous payback over the years. This is not money, this is capital. I have a savings account with 3 months salary. That’s money.
  2. For every 20% growth I take home for example 20% of the profit. So in G-ME for example I started buying early and by $90 I only had profits invested. By 300 I had sold about 2/3 and on the way down I dropped the last stocks at 115.

So let’s say a stock grows from 100 to 120. I take back 4. Then it goes to 140, I take back another 8 so now I have taken 12 total.

Obviously there is some flexibility here, but use it for inspiration. For more secure stocks you may wanna hold on more and longer, but for me it’s a lot about maintaining that cash position.

So what do I do with my profits? Well, I do a few things.

  1. I reinvest them in to other stocks, so I make sure I have a short list of alternatives at all times. For example, my G-ME winnings (yes it was a casino) paid for 300 PayPal stocks at $231. They’re now up 15%.

Compound that interest, bitch.

  1. I put them in the cash position so I can be opportunistic (but still max 15%). Life saver in March, pure rocket fuel baby.
  2. I buy my wife or kids presents, I get a nice Rolex or refurbish the house. I turn it in to money. I have money so I can spend it, use it.

Moral of the story or TLDR;

Make money, you probably won’t see another opportunity like the one of the past 6-10 months. Its not coming back for a while.

Don’t step out of the market, pick your stocks wisely, keep some cash to pounce on some disappointing earning calls or dips and remember: IT IS NOT MONEY UNTIL YOU SELL.

Disclaimer 2: I was a licensed financial advisor as in a securities analyst, but do your own research. This is not advice, it’s inspiration.

PS Eli went on to be a very successful entrepreneur and has started a few companies. I believe one of them is going to IPO soon DS


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