When should I sell a stock?

May 1, 2001
I don't play the stock market, but can share a few good ideas I've picked up over the years. Peter Lynch wrote once that at any given time, a stock is at a fair price. The assumption is that we have a very efficient financial market where willing buyers and sellers will quickly come to a fair price.
1304qa Chang New
Q: I am not doing well in the stock market this year because I can never decide when to sell. What should I do?A: I don't play the stock market, but can share a few good ideas I've picked up over the years. Peter Lynch wrote once that at any given time, a stock is at a fair price. The assumption is that we have a very efficient financial market where willing buyers and sellers will quickly come to a fair price. So, instead of looking at the price, look for trends and changes that are occurring that might impact the price of the stock. Those changes can be in the company strategy or the mood of Wall Street. A very good discipline is to ask yourself if you would buy more of the stock that you own at its current price. If the answer is no, then immediately sell. It is very easy to react to know-it-all analysts and stockbrokers. The thing for you to do is to establish a set of investment rules and learn to abide by them.Q: Why aren't there more industry standards to stimulate the growth of the optical-communications industry?A: Standards are hard to establish because they intrinsically have to satisfy conflicting demands. Buyers want standardization so they can have multiple suppliers providing nearly identical products. That will certainly lead to lower prices. Sellers, on the other hand, want to have product differentiation to become preferred suppliers. The argument invariably boils down to lower prices can lead to more sales for everyone. The problem is that not everyone believes a given market is elastic (lower prices lead to more sales). Standards are particularly difficult to establish in a young industry like optical telecom, in which the applications require a wide range of disparate technologies and where rapid product innovations are taking place. Our industry has been talking about establishing standards for "classical" optical components like lenses for at least 15 years without success. What is likely to occur in telecom is that individual products can become so popular that they become defacto standards. Q: What's intellectual property (IP) contamination and how can we avoid it? A: This is easier to explain with examples. The business development manager of a laser company signs a nondisclosure agreement (NDA) with an inventor, not knowing an engineer in the company is working on a similar design. You can well imagine a dispute will result. Venture capitalists are especially vulnerable to this because they simply would not be able to know what is occurring in the labs of the many companies in which they are invested. Another example is if an engineer makes an invention after listening to a proprietary disclosure, the disclosing party could have some claim to that invention as well. A third example is related to people taking new jobs in competing companies. What all of these scenarios have in common is the potential for mixed or unclear ownership of IP, which can be problematic.

To avoid IP contamination, some companies maintain a "clean room" approach, keeping the people receiving confidential information from talking to their R&D groups, and segregating new hires possessing proprietary information from people working in similar areas. Companies can also minimize their exposure by limiting the number of NDA's they sign, by listening to nonproprietary information and deciding it's worth continuing to the next step before signing. Some big companies will even go so far as to have the disclosing party sign an agreement that in effect says "anything disclosed will not be treated as proprietary." Signing a well-written NDA may be appropriate; but perhaps most important is understanding the ramifications of exchanging confidential information.*

Q: As a marketing consultant, I am shocked that some company founders have the attitude that a technically superior product will sell itself enough to get the company acquired. I hope you'll point out the importance of marketing.A: This approach has actually worked in some cases because technology plays such an important role in our industry and therefore some founders assume that's the way it works. The truth is a business can go so much further if it has both good technology and good marketing.

Not paying attention to marketing is a very risky approach. People won't be buying your product if they don't know about it. It also means that there is no close interaction with potential customers, resulting in products that are only "almost right"—interesting, but not something anyone would buy. And it is usually companies with products that are successful in the marketplace that get acquired. Since being acquired is not within one's own control, it is naïve to trust one's future to luck and then end up with a company that goes nowhere.

*I gratefully acknowledge Paul Davis ([email protected]) for his input. You can find his article on patent strategy at: http://www.ljx.com/practice/intellectualproperty/express/031898/fence.htm.

About the Author

Milton Chang

MILTON CHANG of Incubic Management was president of Newport and New Focus. He is currently director of mBio Diagnostics and Aurrion; a trustee of Caltech; a member of the SEC Advisory Committee on Small and Emerging Companies; and serves on advisory boards and mentors entrepreneurs. Chang is a Fellow of IEEE, OSA, and LIA. Direct your business, management, and career questions to him at [email protected], and check out his book Toward Entrepreneurship at www.miltonchang.com.

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