It has taken me a couple of days to getting around to writing about the LinkedIn (LNKD) buyout by Microsoft (MSFT) mainly because this whole deal was a grave irritation to me.
Let me start off first by saying that I was long LNKD on Friday – Yes, Friday. I had a stop-loss that was well reasoned that was at $131.40.
If the stock dropped below its 8-day range on Friday, I wanted to be out of it. It took out that stop-loss literally in the final hour of trading on Friday. Obviously, when I am making buy or sell decisions, or deciding where to place my stops, I am not considering the possibility of a buyout. They are so far and few between, to be trading the stock when the buyout actually happens, is impossible to predict with any certainty.
It is like a a basketball team basing their entire game plan off of the possibility of the opposing team throwing up a full court shot and sinking it. It doesn’t happen enough, to concern yourself with it, and to focus on such an outlier only takes away from where the focus should be and that is managing risk and maximizing the reward.
Now had I not been stopped out, I would have been in a position to capitalize on the buyout on Monday. True!
So then I should widen my stops more, right? False!
By widening the stop more than what my trading strategy calls for is absolutely foolish. Essentially I would then be increasing, unnecessarily, the risk I take on a trade in hopes that I don’t let a buyout blow by me again and then it may still take out those stops and still blow buy me.
That is exactly what the market would want me to do. Give it an opportunity to take more capitial from my losing trades that result in losses, so that my profitable trades become less substantial and thereby skewing my risk/reward for a given trade.
I can assure you that is not the strategy you want to employ.
If you are lucky, and I do mean lucky, perhaps over the course of a given year you are part of a buyout. I’ve had them before, simply because I was in the right place at the right time, but they are far and few between. But yes, missing the LNKD buyout is highly irritating, and when I saw it flash across the wire that MSFT was buying them, I literally spit out my Krispy Kreme Donut that I was stuffing my face with (which ironically, also got bought out this year).
So going forward, the lesson to take from the LNKD trade is really to stick to what I have been doing in the past. Not adjusting how I place my stop-losses, because a buyout is such an outlier that trying to base a trading strategy around that kind of event is futile, if not darn right irresponsible management of the portfolio’s capital.
