Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

A lesson in Icahn-Netflix trade of when to get out

Carl Icahn, billionaire investor and chairman of Icahn Enterprises Holdings LP
Scott Eelis | Bloomberg | Getty Images

Buy low and sell high: It's the oldest and most fundamental investing advice and so difficult it takes someone like Carl Icahn to do it.

Nowhere was that more evident than in the activist investor's masterful handling of his Netflix trade, a 14-month maneuver that saw the share price soar by six times from when Icahn originally declared his nearly 10 percent stake.

Icahn knew not only when to get in but when to get out. He even had to overrule his own son in making the decision to halve his stake in the online video rental company.

(Read more: John Sculley to Apple: Ignore Carl Icahn)

There's a lesson here for investors who have enjoyed riding the wave that has sent the up 22 percent in 2013 and 24 percent over the past 52 weeks, during which at least 18 of the stock market index's component companies have surged more than 100 percent.

When do you cash out?
When do you cash out?

"When companies have 200 and 300 and 400 percent returns in 12 and 18 months, the prudent thing to do is say, 'I still love the company but let's take some of our profits'," said Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh. "What Icahn did was classic long-term strategy in taking money off the table, which is very prudent."

(Read more: Carl Icahn cuts his Netflix stake in half)

If buying low and selling high is the oldest market adage, nobody ever went broke taking a profit might be next.

Yet it's a lesson so many investors fail to get. When a stock has a ride like Netflix's, the biggest temptation is to stay in the game in hopes that the run can keep going straight to the sky.

Sadly, that doesn't usually end well.

Does the perfect trade exist?
Does the perfect trade exist?

"Nothing is forever," said Mitchell Goldberg, president of ClientFirst Strategies in Dix Hills, N.Y. "If you had a stock that went from $5 to almost $50, it would be less than prudent not to take some off the table. Any investment professional would advise his or her client to do the same thing."

(Read more: 2 years, no correction, and what's bad about that)

The problem is those clients don't always listen.

Icahn's own son, Brett, opposed Icahn Enterprises decreasing its Netflix state, contending in a statement that the company valuation "is still relatively low."

The elder Icahn, though, said he's been through seven bear markets and has learned "that when you are lucky and/or smart enough to have made a total return of 457 percent in only 14 months it is time to take some of the chips off the table."

"It was the perfect example of old school versus new school," said Keith Springer, president of Springer Financial Advisory in Sacramento, Calif. Springer cited another old though lesser known adage: "Bulls make money, bears make money, pigs get slaughtered."

(Read more: Father Knows Best: The Carl Icahn edition)

Springer, though, thinks the kind of move Icahn made should be emulated only for speculative plays. Long-term investors ought to hold tight to their core positions in the current market, which he think still has room to run.

Still, temptation beckons, and with good reason.

There are six stocks, in addition to Netflix, in the S&P 500 that are up more than 100 percent year to date: Best Buy, Micron,GameStop, Delta Air Lines, Boston Scientific and Celgene.

The inclination to take at least some profit seems rational.

—By CNBC's Jeff Cox. Follow him on Twitter @JeffCoxCNBCcom.