When it comes to timing their exits, investment luminaries like Warren Buffett, George Soros, and other successful investors typically employ one or more of the following six strategies:

When the Investment No Longer Meets Criteria: For instance, Warren Buffett sold Disney stocks when they no longer met his investment criteria.

When a Predicted Event Occurs: Some investments are predicated on the occurrence of specific events. A classic example is George Soros's bet on the devaluation of the British pound. He exited his position when the pound was ousted from the European Exchange Rate Mechanism.

This is also true when Soros engages in merger arbitrage. He exits either when the merger is completed or when it falls through.

In any of these scenarios, the occurrence or non-occurrence of a particular event determines the success or failure of the investment.

When the Investment Reaches Target: Certain investment systems set a target price for an investment, which is the exit price. This is a hallmark of Benjamin Graham's method. Graham's approach involved buying stocks priced significantly below their intrinsic value and selling them when their prices reverted to that value (or after two to three years if they hadn't reverted).

System Signals: This method is mainly used by technical traders. Their sell signals might come from specific technical charts, volume or volatility indicators, or other technical metrics.

Mechanical Rules: For instance, setting a stop-loss point 10% below the purchase price or using a trailing stop-loss (adjusting upward as prices rise but remaining fixed if they fall) to lock in profits. These mechanical rules are most often adopted by quantitatively disciplined investors or traders following risk control and money management strategies.

One friend's grandfather employed such a mechanical exit strategy. His rule was to sell any stock that rose or fell by 10%. This rule allowed him to emerge unscathed from the 1929 stock market crash.

Recognizing a Mistake: Identifying and correcting mistakes is crucial to investment success.

Investors without well-defined criteria or standards cannot apply these exit strategies effectively because they lack the means to determine whether an investment still meets their standards. Additionally, they won't recognize their errors when they occur.

An investor without a system has no preset targets or signals for selling. For such investors, following a mechanical exit rule is the best practice. At the very least, it limits their losses. However, it does not guarantee profits because they aren't doing what successful investors do: first selecting investments with a positive average profit expectation and then building a successful system around it.

Cut Losses, Let Profits Run

These exit strategies share a common feature: they are impersonal for investment masters.

Investment masters are not concerned with how much they profit or lose on a given investment. They simply adhere to their systems, with exit strategies being just a part of these systems.

A successful exit strategy cannot be isolated from other factors. It is a direct result of an investor's criteria and investment system.

This is why ordinary investors find it so difficult to realize profits and accept losses. Everyone tells them that successful investing relies on "cutting losses and letting profits run." Investment masters agree with this principle, which is why they establish systems allowing them to successfully implement this rule.