We saw a real-world equivalent over the weekend during the NFL draft. Matt Leinart was destined to be the top pick out of college during last year's draft. The young quarterback had led USC to a national championship in his junior year, and the two pro teams picking first last year -- San Francisco and Miami -- had a huge void to fill at the position he played. The gridiron signal-caller was a no-brainer to collect the big bucks that accompany the No. 1 selection. But instead, the 2004 Heisman Trophy winner decided to come back to USC for another year, to defend his university's title.
Some will argue that Leinart did the right thing by coming back to complete his college work and keep his team competitive. But he had nothing left to prove at that level and nowhere else to go but down.
As his senior season played itself out, it became apparent than Leinart had made a mistake in skipping the 2005 draft. He was no longer the best player in the country. He wasn't even the best player on his own team, with Reggie Bush emerging as the true superstar and the 2005 Heisman recipient. Leinart led USC to a great season but ultimately came up short in the national championship game against Texas.
How far had Leinart's stock fallen? On Saturday, nine other college players had their names called before the Arizona Cardinals picked him. Instead of being the San Francisco starter last year, Leinart will now have to travel to Arizona, where the No. 10 overall pick is likely to be warming the bench for another year or two while Kurt Warner directs the Cardinals' offense.
Leinarts in your portfolio
You can't feasibly expect to sell your stocks at the top. That's OK. You don't really need to in order to become a great investor. You just have to get the balance right. You can't cash out too early in the stock's run, yet you can't be caught holding on to a stinker after its expiration date.
History is filled with relevant examples. My own trading history is no different. I held on to Krispy Kreme (NYSE:KKD) for far too long, assuming that the early cracks in the glazed frosting were temporary. I continue to hold Great Wolf Resorts (NASDAQ:WOLF) even though the indoor water park resort leader did just about everything in its first year as a public company to sway me away.
I'm not perfect. I'm guessing that you may fall a few shades shy of the ideal, too. Join the club. But while you're at it, bring a club to whack some of the deadweight out of your portfolio.
Go pro in the nick of time
There's a catch to making this work, though. When I mention companies like Krispy Kreme or Great Wolf, you can pull up a chart and nod along in retrospect. The challenge that will make you a market-thumping investor is to find these stale stocks before you're running along with others to the exit door. It may be something as simple as a blown quarter, surging inventory levels, or out-of-control accounts receivable. If you're going to wait until a bailing auditor laughs uncontrollably on the way out, it may be too late.
One pretty telltale sign of trouble is a pointless secondary offering. The Motley Fool Rule Breakers newsletter team that I am a part of recommended a sale of rate publisher Bankrate (NASDAQ:RATE) last month. It may have felt like a controversial ditch because the stock has performed great financially. It had soared 57% higher since David Gardner had singled it out the nearly seven months ago. But his decision to nudge readers to move on was influenced by the company's dilutive secondary offering.
Secondary offerings can be tricky. One of my favorite stocks -- Netflix (NASDAQ:NFLX) -- is seriously testing my patience with an offering that it is looking to complete this week. The shares have nearly tripled over the past year, and the message seems to be that a cash-rich Netflix would rather be a seller than a buyer at these levels. I don't like it, and I hope I'm not making another mistake of holding on to a stock after it starts smelling funny.
Striking a Heisman pose
Buying quality stocks is important. But is buying a good stock at a bad time better than buying a bad stock at a good time? I don't think so. That's why it's important to monitor your portfolio. The "buy and hold" mantra is a good one, but that implies that you know what you're holding. All it takes is a few quarters to go by to change anything from your investment's business model to its industrial position.
JetBlue (NASDAQ:JBLU) didn't seem to be doing a whole lot wrong operationally, but the cutthroat dynamics of its sector finally caught up with the edgy discount carrier. Kodak (NYSE:EK) embraced digital photography, but that was no match for the reality that it just wasn't the same kind of lucrative market that it had in its dying film and photofinishing business.
Then you have companies that did what many investors wish they could have done by cashing out at the right time. When Mark Cuban's Broadcast.com was sold to Yahoo! (NASDAQ:YHOO) in a whopping $5.7 billion stock deal before the dot-com bubble popped, it made a billionaire out of Cuban and of other sharp investors who cashed in. That was last year's Leinart. In practice, it should be the everyday version of you.
By waiting too long, Leinart won't have the same kind of negotiating leverage he could have had a year earlier. His new team is in no hurry to sign him up, and Leinart's contract will be no match for the package he could have -- and should have -- received a year ago.
The Motley Fool Rule Breakers newsletter specializes in unearthing great growth stocks before the masses buy in, but you always have to remember that timing is everything on both sides of a stock trade. Buy in before the masses? Check. Cash out before the masses? Check, please.
Good luck in Arizona, Matt. Here's hoping that the last thing you fumble is the timing of your NFL entry.
JetBlue and Netflix are activeMotley Fool Stock Advisorpicks. Bankrate and Great Wolf Resorts are Rule Breakers selections that ultimately became recommended sales. You can check out the rest of the active and inactive picks with afree 30-day trialsubscription to see whether it's right for you.
Longtime Fool contributor Rick Munarriz finds that eating, sleeping, and breathing growth stocks will work wonders for your financial health. He does own shares in Netflix and Great Wolf Resorts.The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
