I'm not going to post every time I move in and out of a stock, but I'll post this one so you can see why I sell.
WFMI (Whole Foods Market, Inc.) is a wonderful company at an attractive price. Nonetheless, like any company in this market, it could go down if the institutions start to sell off. Which they do on a regular basis for many reasons - a negative analyst report, bad press, interest rates go up, interest rates go down, sector bad news, or just taking profits ... who knows. Could be anything or nothing at all that starts the selling and then, like lemmings off the cliff, the other institutional guys start selling, too.
It isn't really that they are lemmings. Actually they are a bunch of really, really smart guys (well, mostly guys) who have billions in the market.
If you had billions in the market and you wanted to get to cash, how would you do it? Would you just yank it out of there? You could, but what would happen is that all these trading programs would see a huge block trade hit the floor, and everybody would hit the panic button and sell to get out of there before this billion dollar block could be sold off.
Remember October 1987, when the whole market dropped 25% almost instantly? That was triggered by computer-driven block selling by institutions. If they can do it to the entire market, how much easier is it to do it to one stock? Of course, they all know that, so what they do instead is sell off little pieces over a long period of time to keep from being spotted by the other guys who are doing the same thing.
The average block of stock selling today on the New York Exchange is 345 shares. That's about $10,000 average per trade. If I'm running a five billion dollar fund with 3% in WFMI, about $150,000,000, I'm going to have to do a lot of trading to get all of that out of there without the whole market coming unglued and dropping like a stone. I can't sell it all at once, so I'm going to sneak the money out in blocks about the average size. Say $10,000 per trade. Still, that is going to require about 15,000 trades. 15,000 trades is a lot.
Since Whole Foods stock trades about 2 million shares a day in normal trading, about 15,000 trades on average per day, I can't just double the number of trades. The market would go nuts and the price would gap down. A big gap down will wipe out the profits I'm trying to hang on to by getting out in the first place.
I'm going to have to do this over a longer time than one day. If I'm going to take it ALL out of WFMI, I'm going to take 6 to 12 weeks to do it and sneak it out so nobody notices. To get the job done in 12 weeks all I have to do is make 250 trades a day. That's still a lot, but if I spread it across ten brokers, it's not so bad at all. But still, it's going to take 12 weeks.
You see the problem. If somebody big starts to run for the door and I have $150,000,000 in there, I almost have to run with them even if I don't see the problem -- or, if the building turns out to be on fire, I'm not going to get out alive. Trading for a big fund has to be one of the scariest jobs on earth.
On the other hand, if you and I -- individual investors -- could possibly notice that somebody big was starting to move out of WFMI every day, we could get outta there in about 8 seconds. Nothing is stopping us from moving our money fast. That's an advantage we have over the big guys.
There are great Tools out there that we can use that will help give us that advantage. I've waited for several days to get the last of three key Tools to signal me to bail out of WFMI. Today I got it and I sold. It took 8 seconds and the price of WFMI didn't even budge. I sold at $117. (I'll tell you about the Tools in another post someday.)
You don't have to sell WFMI. I'm going to buy WFMI back someday soon. Maybe tomorrow. Maybe not for six months. It depends on what the big guys do. I know these things for certain: WFMI is a wonderful company at an attractive price, but the price won't go up until the big guys start putting their money back into it.
Meanwhile, my money is safe in cash in my trading account or in some other company that I like as well as WFMI, into which the big guys are putting money right now. If you want to leave your money in WFMI, I'm certain you will make money in the long run. I just want to never be at risk and to make the money in the short run, too.
Getting out is key for the little guy to avoid breaking Rule #1. If we don't violate Rule #1, we'll hold on to these great gains, and that will give us a great annual compounded return for our entire portfolio.
