POST OF THE DAY
The BMW Method
An Exit Strategy

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By BuildMWell
October 23, 2007

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We often talk here about exit strategies, but I have never really come up with anything definite. However, I do have one strategy that may be of interest. It just triggered a sell for me and, thus, I am reminded of it today.

Before I leave home for any vacation or other extended period event, I quickly place limit orders on my big gainers just in case Mr. Market makes an unexpected upward move. I recently did that with several stocks...FARO last week, AVP in July, NOK two weeks ago, and SSD when it spiked above $38/share last summer. Time will tell if I made a smart move, because all of these will ultimately go higher. But, I have time to decide if I want them back or if I need to look elsewhere. Right now I have a boat load of cash and that makes me nervous too.

The sale that triggered this thought process was my FARO. I put a sell order in at just under $50/share not really expecting it to happen, but the sale activated while I was getting myself prepped for the BMWM Conference. Thanks to this board I was able to get into FARO at an average price below $14/share and realize a triple in about 16 months. Of course, FARO is not a BMW stock, nor was NOK or DRL. However, I cannot keep myself from stretching the Method beyond it's original design. I have had more successes than failures doing this. Obviously, Doral was a failure...so far. As we discussed at the conference, it bothered me that I was out BMWM'ed by an expert. Bear Stearns bought Doral at the low CAGR by creating that low CAGR. I am not big enough to play their game. I could have played with them if I had the $625 million needed, but I was about $625 million short of the mark.

Anyway, I will sell my Doral and take that excellent loss against my other nice gains. That will decrease my tax burden and allow me to buy the DRL back in a month or so. That is my exit strategy and re-entry strategy for Doral at the same time. I want to own DRL for a while longer because, as I mentioned at the meeting, there is something more there than meets the eye. I just wish that I knew what it is.

At the conference, Greenerd suggested a novel approach so that I do not miss any of the DRL fun. He said I might look for a pull back on Doral and buy my new shares in October or November and then sell my losing shares in December for a 2007 tax loss...after 31 days have passed. That way I do not risk a sudden run that would hurt my re-entry.

I am not recommending Doral to anyone else. This is a little game I am playing and it could have disastrous consequences. There are too many great companies with much less risk available to mess with a stock like Doral. I will keep the board informed in the future about DRL as this unfolds.

The conference turned up a number of super ideas for investment right now. I think these will be discussed here in the near future so I will not get into those now. I will let the folks who presented them in Raleigh do the same here.

The point of this post is to explain how I use limit orders in lieu of stops to exit a stock. If Mr. Market gets crazy in the short term, I like to take advantage of that move. With a stop loss order, you leave money on the table and can get whip-sawed. With a limit order, you get your desired price or you stay in the stock. I get nervous with big gains sitting there while I am indisposed. I do not worry too much about a sudden drop if the stock's earnings are still solid, but I hate to miss the chance to sell on a sudden price rise. That way, I become the whip-sawyer. Limit orders do my thinking for me. Then, having way too much cash presents me with a really nice problem to solve. But, I can do it at my leisure.