A good exit strategy?

I have a portfolio that consists primarily of: 10-15 shares from the Midcap to small cap segment, liquidity is acceptable and rebalancing happens every 4 weeks

Then I read through some of the forum recommendations and looked at the strategies some use in publicly available simulations. These are some examples:

Sell5Rating (“Core: Quality”) < 30
SellRule4gainpct > 15
SellRule5gainpct < -10
SellRule6nodays > 60
Financial StrengthCurRatioQ < 2.00
Balance SheetDbtLT2EqQ > .5
SellRule2PctFromHi <=15
RankPosCnt > 20 and RankPos > 20
GainPct < BenchPct & NoDays > 30
EMA(50) < EMA(100)

Anybody that can suggest a good or acceptable exit strategy the they have some experience with?

Whycliffes -

You might wish to create a composite ranking system from three or more of the rules you found. In my experience, setting a hard level from placing those indicators in the sell rule – levels that are usually either arbitrary or over-optimized – result in much less robust returns than using them in a ranking system. Your ranking system will create a relative comparison, and you can use Rank>95 in your Buy Rules and Rank<= 95 (for example) in your Sell Rules.

Even better, combine formulas from a variety of indicator regimes, such as macroeconomics, fundamentals, technical, and sentiment. Your ranking system can be used in the Buy/Sell rules, and in the ranking system that selects stock positions.

Also, if you must use hard-sell levels on these rules, your “PctFromHi” formula should use -15 instead of 15. Learn how to backrest your sim using many different approaches, without over-optimizing for the level (i.e., PctFromHi<-16, PctFromHi<-17, etc., and using the best of those variations. You end up perfectly predicting the past rather than a logical solution in the future.

It can take a lot of time and focused effort to create a unique investment system, but it’s worth the extra effort.

Thank you for responding. I’m taking everything with me in my learning.

Yes, I spend a lot of time in front of the computer learning and reading, and learning and reading, and learning and reading.

In one of his posts, Yuval only uses “RankPos> XX and StaleStmt = 0 and NoDays> XX.” It’s similar to what you mentioned, in that you can use the ranking system itself as an exit.

One rule I use now in all of my ports is a benchmark drawdown rule. This was a consequence of the COVID sell off where my ranking systems failed; maybe a poor choice of words, but not sure if there is better one. I also use correlation filters to try and keep diversified, but as the saying goes - everything is correlated in a market crash. When things go south in a hurry, I’m more than happy to sit in cash. That benchmark rule is in both buy and sell rules - so existing positions are liquidated, and no new ones are taken.

That said, I second what Chris is saying; I let the ranking system do the work, not the buy/sell rules. In fact I think every port I have now uses the same buy/sell rules “set”. That might be suboptimal, but it works for me.

I should add: I also use custom universes. If I want to focus on mid caps, I can do that with custom universe instead of messing around with my buy/sell rules.

I don’t have any special insight. What I’ll add is that in my current systems many stocks might oscillate near the cutoff range of a ranking systems cutoff point - sometimes slightly below, sometimes slightly above (example if cutoff is 95th percentile, then same stocks might often oscillate between 94 to 96 percentile in the rankings.) To reduce turnover it might make sense to let a currently owned stock stay in the portfolio if it’s still “close” to your cutoff point. For example - maybe only buy if the rank 95-96 or above, but only sell or fully sell if it falls below 94. Obviously adjust the cutoffs to fit your system.

It probably depends alot on the stability of a system’s factors - but I currently have a fairly heavy quality tilt and quality factors don’t change a whole lot so there’s quite a bit of stability from month to month - but if turnover, taxes, wash sale rules, slippage, etc matter then loosening that sell constraint may be useful. Sometimes I’ve had blips where a strong company just disappears from the rankings for a short while. It’s rare, and I’ve been unable to completely determine why - usually around earnings so my guess is it may have something to do with mix of old/new data or NAs - may happen more with foreign companies - but being patient with those may make sense as (at least in my systems) they often will reappear if the earnings report and guidance was acceptable. I’ve also had cases where a stock I’ve never seen before pops into a buy position for a few days and if I wait a few days those often go away (at least in my systems).

Why sell?

If you have a stock worth owning in the first place and the position is profitable, why sell it? Why not let your profits run?

In the U.S. we have to pay tax on any realized capital gain and this puts a drag on one’s portfolio.