On Friday, I tweeted the following:
Let's first review the micro thesis behind such a seemingly sudden decision. IWSY has always been a volatile investment vehicle. I have been in and out of the name numerous times since I initiated a position and released research in March of 2013. I know very well that IWSY enjoys whipsawing market participants along its path of least resistance, which has mostly been up over the past year and a half. It was no surprise to see the name whip around in the manner it did following the positive news of a major retailer being signed up that was rumored to be WMT.
What turned me off with this past week's activity was a realization that I can no longer be sure of how much risk I am taking to achieve any potential reward. The highly inaccurate hit piece that was released this week is surely not the issue. Controversy is the name of the game in early stage technology adoption. There will never be a consensus regarding the validity of the technology or the viability of the company behind the technology. Negative criticism occurs in nearly every stage of a highly-visible technology company's life cycle. It is the reaction to the inaccurate hit piece both in terms of price and volume that instantaneously layered IWSY in what I can best describe as a thick fog of confusion in terms of my risk going forward.
If sellers were so quick to damage the name on grounds of a questionable article, what happens if management doesn't execute in the next quarter? Now that IWSY has become a circus of sorts, with competing Seeking Alpha articles, management's threshold for error is reduced remarkably going forward. The price action is screaming that fact here. On the flip side, management will also be rewarded that much more in terms of stock performance with positive developments as a powder keg of volatility is sure to ignite on any surprise positive developments.
Again, irrespective of these possible outcomes, I didn't know how much risk I was taking to achieve any type of respectable reward going forward. The situation has become devoid of proper perspective...for me, at least. When that happens, I can't continue in the investment.
The macro side of this is grounded in portfolio theory. If an investment manager has a methodology that has a positive expected value over the long-term, then it can be expected that positions that are underperforming can always be replaced with positions that will outperform. The expected value of rotating the portfolio or performing a CTRL+ALT+DELETE reset of the portfolio will be a positive one. The expected value of remaining stagnant (purposely and stubbornly holding onto fundamental beliefs that a stock is cheap; management will deliver; the situation will change because of positive momentum in the general economy) in the face of adversity will be negative because you are no longer tapping into any statistical edge you have and instead are relying on a rescue by a situation that cannot be measured or predicted. The investment manager who does this, of which I can say a majority do, relies on hope instead of skill. If you possess a statistical edge in your investing there is NEVER a need to remain in a compromising position.
It is far too often that investors will become mired in situations that they no longer understand because of pure stubbornness that is grounded in a philosophy of curve-fitting expectations around share price.
Rotation > Stagnation.
