Showing posts with label Sell the losers. Show all posts
Showing posts with label Sell the losers. Show all posts

Sunday 16 July 2017

Sell the losers and let the winners keep riding


For long term investing success it is important to ride a winner. 

Ever so often, investors make profits by selling their appreciated online stocks, but hold onto stocks that have declined in hopes of a rebound. 

If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. 

Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice.

If you have a personal preference to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. 

No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever succeeded.

Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.

Thursday 9 June 2016

SELL THE LOSERS, LET THE WINNERS RUN.


Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.

Tuesday 31 May 2016

The key to profitable investing - knowing how to capitalize successes and curtail failures.

An investor who year in and year out procures for himself a final net profit.

An investor who year in and year out who is usually in the red.

What might be the reasons to explain their different outcomes?

Is this entirely a question of superior selection of stocks?  Maybe NOT entirely.

Is this entirely a question of superior timing of buying and selling of stocks?  Maybe NOT entirely.

How good are economists in their forecasts?

In a meeting of economists, they agreed if their forecasts were 1/3 correct, that was considered a high mark in their profession.

You cannot invest in securities successfully with odds like that against you if you place dependence solely upon judgement as to the right securities to own and the right time or price to buy them.

It is also a case of knowing how to capitalize successes and curtail failures.

You have to learn by doing.


Wednesday 9 March 2016

Making investing enjoyable, understandable and profitable...*



Is it not true, that the really big fortunes from common stocks have been garnered by those who made a substantial commitment in the early years of a company in whose future they had great confidence and who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."  

 :thumbsup:
------------------


BENJAMIN GRAHAM'S 113 WISE WORDS
The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

 :thumbsup:
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PHILIP FISHER'S WISE WORDS
"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

 :thumbsup:
--------------------


Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

 :thumbsup:

Friday 26 June 2015

"The 4 Diseases" of Investing - Evenitis (holding to losers), Taking profits (selling winners), Over-trading and FOMO

Teaminvest Co-founder Professor John Price, recently recorded an informative 4.5 minute video about the behavioural biases that often block rational decision-making about investments.

It’s titled “The 4 Diseases”. In the video he explains the four common behavioural biases and fuzzy thinking affecting the way we assess investments. He calls them:
  • Get even-itus
  • Consolidatus-profitus
  • Trade-a-filia
  • FOMO
Watch the video and see if you suffer from any of them? - Self awareness will improve your investment decision-making!

Click on John's pic
Regards
Signature

Mark Moreland

Co-Founder



NOTES:
Stock selection
- Read the annual reports
- Read all the analysts reports
- Visit the stores or use their products and services

If you find that at the end of the day, the performance of the portfolio is not that good, or mediocre at best, in many cases there are various reasons.

They often have not taken into account behavioural biases, the sort of fuzzy thinking that is automatically in their mind that blocks out their rational decision.

These are the 4 behavioural biases, which we refer to them as:

  • Get even-itus
  • Consolidatus-profitus
  • Trade-a-filia
  • FOMO

Get even-itus

The disease of hanging onto a stock when the price has gone down until you can get even.  "Don't worry dear, it is going to come up back again."   The problem is, if the stock has gone down, the chances are it is going to continue to go down and best it is going to be a mediocre investment.  It is much better to face the fact that you have a loser, you lost money and to move on.

Consolidatus-profitus

This is the opposite to get even-itus.  This is the disease of always taking a profit when the price goes up.  It looks great and you can tell your friend at the dinner party that your stock went up 20%, 40% or 50% and you sold it.   The problem is what you are going to do with that money.  Studies have shown, on average, people who sell just to take a profit end up putting their money back into the market in a stock that underperforms the one they got out of.  #

Get even-itus and Consolidatus-profitus are two sides of the one coin; generally hang on to losers and sell winners.  The opposite would be better, that is, sell your losers and hold on to your winners.  They water the weeds and cut the flowers.  It would be better they  water the flowers and cut the weeds.


Trade-a-filia

This is the disease of just loving to trade. Most people who would never dream of going to casino betting on roulette or any of the casino games or machines,yet when they are on their internet and looking at their stocks, they trade far too often.  It is so simple to trade on the internet and they get drawn into it.  But studies have shown that on average, the more a person trades they worse they do. I am not referring to their transaction costs but actually their performance diminishes.  Instead of looking for great companies that are going to make you money year after year, they think they can get a short term profit.   In the short term, the share prices are much more random than most people believe.  So this is a disease of trading too often.  In this regard, women are better investors than men, because overall, women trade less than men.  


FOMO

This is the 4th disease, the FEAR OF MISSING OUT.  You read about a particular stock and its price is going up and you think, if I don't get in now, I am going to miss out, instead of taking your time and evaluating the stock properly.   



These 4 diseases really work together and at best give you a mediocre performance that is far far below you optimal performance.  

You should work to eliminate these 4 investing biases or diseases, consciously.  Use tight filters to filter out the best companies to concentrate in.  

Be alert that you are not slipping into these investment biases.  Eliminate these investing biases and your performance will be much better. 



# Reinvestment risk.

Sunday 7 April 2013

Invest like Buffett - Hold on to your Winners Forever

Best holding period is holding forever.
Sell your losers, hold on to your winners.

SELL THE LOSERS, LET THE WINNERS RUN.
Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.




< I suggest this video: http://www.youtube.com/watch?v=WVqyCRYBieI >
Newbie
on 4/7/13

Thanks to Newbie for highlighting this video to me.

Monday 9 July 2012

SELL THE LOSERS, LET THE WINNERS RUN.

Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. 

Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.

Thursday 15 July 2010

How to Not Ruin Your Portfolio

How to Not Ruin Your Portfolio


By Abraham
Jul.15, 2010

Today’s article isn’t really a screen (although I do have one at the end). I want to talk about something that I believe is critically important in light of what’s been happening in the market.

And that’s about managing your risk — using stops, cutting your losses — all of that stuff.
Not a fun topic, but probably one of the most important for right now.

What’s interesting is that nobody ruins their portfolio when the market is going straight up. It’s when the market goes down that people get into real trouble.

But ironically, it’s when the market is going up that a lot of these bad habits are created.

The problem is that even bad decisions are oftentimes rewarded in a bull market. But when the market is going down, there’s no mercy for bad decision makers. Sitting on losses in hopes of them coming back can ruin your portfolio as they grow bigger.

I like using a 10% stop loss rule because it’s kind of a tit for tat. If you lose 10% on a trade, you only need a little bit more than 10% to get that money back (11.1%).

But if you lose 20%, you now need a 25% gain to get that money back.

And it gets worse as it goes down.

If you lose 30%, you now need nearly a 43% return to get back to where you were.

And if you lose 50% — you now need to pull out a 100% return to get back to even. (And if you’re so slick that you can pull a 100% return out of your hat at any time, why did you just get clobbered for a 50% loss?!)
So I think it’s important to keep your losses small.

Why do so many people find it hard to cut their losses short?

I think a lot of people hate taking losses because they fear that if they get out, and the market goes back up, they’re going to miss out on the move.

Like somehow, they’re going to get out and it’s going to go up a million percent without them.
First off, that’s nonsense.

Just give yourself permission to get back in.


If the stock does go back up and a paul smith sale big move ensues, the 10% you gave up won’t really matter.

Of course, you don’t want to get back in the moment it goes a tick above where you got out. Give it some proving room. But if there’s a compelling reason to get back in, do so.

Don’t hang onto losers for fear that they’ll all of a sudden become big winners once you get out. You can always get back in. But every losing trade begins with the investor believing that it was going to be a big winner too – otherwise they wouldn’t have made that trade in the first place.

In stocks, nobody is 100% right. So knowing that – take your losses when a trade is not working out and move on to another higher probability trade.

Plus, it can help you stay focused. By keeping your losses small, you won’t  get gun shy on your next trade.

Stock Screen

One of the ways to minimize your downside, in my opinion, is to find stocks outperforming the market.
A simple screen I’ve been running is to look for the top 100 companies that have outperformed the S&P 500 the most.

I add in the Zacks Rank and price and volume constraints (> $5 and > 100,000 shares) to first narrow the universe down. But then I’m looking for the top 100 stocks with the greatest Relative Percentage Price Change over the last 24 weeks.

And you get a lot of interesting companies across all different sectors and industries.

Here are 5 that came through this list for Tuesday, 9/16/08:




http://abraham.ilikehandbag.com/2010/07/15/how-to-not-ruin-your-portfolio/

Wednesday 7 April 2010

It is the selling of losers that is the wealth-maximizing strategy!

Many investors will not sell anything at a loss because they don't want to give up the hope of making their money back. Meanwhile, they could be making money somewhere else.


So, do you behave in a rational manner and predominately sell losers, or are you affected by your psychology and have a tendency to sell your winners? 


This is not a recommendation to sell a stock as soon as it goes down in price - stock prices do frequently fluctuate. Instead, the disposition effect refers to hanging on to stocks that have fallen during the past six or nine months, when you really should be considering selling them. 


Don't hang on to chronic losers! Not only do you lose, but you also lose the out on opportunities to gain. If it's broke, fix it!




It is the selling of losers that is the wealth-maximizing strategy!


Ref:

Emodons Rule

Friday 16 October 2009

Never subsidize losers with winners.

Rather than take the medicine -- the loss -- they hold on to the losers and sell their winners.
 
They never learn my rule:  Never subsidize losers with winners.


Sell the losers and wait a day. If you really want them, go buy them back the next day. I also am certain that you never will.

Eject the losers and the winners will lift the portfolio.

It is the percentage of time that most of a portfolio is invested in rising stocks that determines how good performance will be. Eject the losers and the winners will lift the portfolio.

An exception to every rule. This applies particularly to value investors with long term horizon. Instead of blindly selling the losers until all you have are winners, you should really look at whether the fundamentals have changed for the stocks. There may indeed be a good reason for the relative underperformance of Stock B – e.g. poor management or grim industry outlook. However if nothing has changed and you thought Stock B was good value when you first bought it, it must be an absolute bargain after dropping an extra 50%! Shouldn’t you be buying more instead of selling?

Wednesday 14 October 2009

Investing for the long haul: Sell the losers, let the winners run.

This is the time people should review their holdings, keep the stocks with the best potential, sell the losers (not those with the depressed prices but those whose revenues and earnings aren't capable of growing adequately), and buy others with better potential while they're selling cheap.

Sell the losers, let the winners run.  But you shouldn't jump into any "hot stock" without knowing what you're doing.


Read also:
The Ultimate Hold-versus-Sell Test
http://myinvestingnotes.blogspot.com/2009/09/ultimate-test.html

Let Your Winners Run, Cut Your Losers

When you invest, it is easy to sell your successful investments and keep your failing ones. This is what comes intuitively to most investors but can end up costing you a lot of potential profits. By selling your winners too early, you could miss out on huge gains. By keeping your losers too long, you could realize many losses. This isn't always true, but it makes mathematical sense; if you keep your money in losing investments instead of winning ones, you'll more likely end up losing money.

If you have an investment that has been performing consistently well, there is no good reason to sell it. As the adage states, it is important to let your winners run. By selling too early, you could miss out on a lot more than holding onto a losing investment for too long. When holding onto a losing investment too long, you can only lose the money you initially spent. If you sell too early, you could lose many times the amount of money you initially spent. By letting your winners run, and cutting your losers, you can do much better than doing the opposite. As with all investments, it is still important to do your homework.

Thursday 3 September 2009

The difference between the buy and sell transactions is profit.

I. BUY LOW, SELL HIGH

The idea of "buy low, sell high" is as old as trading ownership of properties. It is the basis of all business. Buy a property at one price and sell it at a higher price. The difference between the buy and sell transactions is profit. To make a profit is the reason to buy and sell stock.

When the investor first heard about the takeover, it was already late in the game to make a play. Thinking for a day or two about buying or selling can sometimes be disastrous. The investor sold out the position without learning the details.

Once a strategy is put in play, an investor should not be so quick to change. The investor should have checked the background on the two companies. The 10 percent loss strategy is just that, a 10 percent loss. It has nothing to do with how a price will perform in the next few days. Some professional investors look for stocks that are down 10 to 15 percent and consider them buying opportunities. They know the 10 percent will be bailing out and the stock prices can become even better bargains. These investors will allow a 10, 15 or even 20 percent drop because the majority of buyers did not buy at the top.

If an investor is going to speculate on takeovers, it is important that he or she realize that the prices will tend to be volatile until the actual takeover occurs.

The axiom "buy low, sell high" should not be followed in reverse by the investor.


II. BUY HIGH, SELL HIGHER

Many individuals are attempting to "buy high and sell higher" when they buy a stock that is on the move. In fact, professional traders frequently use the strategy. Soaring prices are attractive to investors, who believe the prices will keep moving. As long as the momentum of the price swing attracts new buyers, the soaring stock price will continue to climb. It might run up for a couple of days, weeks or even months. Eventually, however, there is a hesitation, followed by a turn as the profit taking begins. The last buyers not only have the smallest gains from the run up, they will obviously also have the biggest losses. It is somewhat like a pyramid scheme where the losers are the last to join.

A severe market decline creates lower prices and large cash positions even though the earnings of stocks can remain unchanged. The bargains can be resisted for only a limited time. In a severe market decline, the climb back to former levels could take a few months or longer, but the recovery will come in time.

Where are the plays?

Individual investors can seek out stocks that are either in play by the institutions or are likely to come into play. Often they are stocks with strong fundamentals in earnings and revenues, found in industries with good growth potential. Medical products and devices can be exciting fast growth companies. Sometimes older products companies with strong growth records do well.

Enhancements

The strategy of buy high, sell higher can be enhanced by anticipated increases in earnings or by corporate takeover situations. Although anticipation of higher earnings creates unusually high ratios, when the earnings do increase, the ratios return to normal levels. If the earnings do not cause a return to normal levels, sellers will eventually force the return.

Takeovers

Corporate takeovers create a different situation. Professional arbitrageurs go on search missions in which they look specifically for companies likely to be bought out by some other company. The large leveraged buyout takeover can become a classic buy high, sell higher situation. For those companies who could arrange the deals, there was less risk with greater profits.

Long-term intention

Buying high and selling higher can be a visible way to make money in the stock market, but it is not without risk. The strategy usually calls for the intention of a longer term hold for example, when the earnings cannot catch up with the price or in a takeover, when the deal is finalized. Although it is possible to trade in and out during volatile times, the whip-saw effects of being on the wrong side can be devastating.

Corporate takeovers that fail to materialize are a different story. If a buyout does not occur, the stock price will probably fall to previous levels or below. Most often, investors would be prudent to sell and take the loss quickly, rather than hang on and hope for a recovery. A prudent play after selling out can be to attempt bottom fishing once the price gets hammered. Such activity should be based on the individual's belief that the stock can weather the storm and that the company is still capable of generating good earnings.

It would not be unusual for institutional or other experienced stock traders to play these stocks for small profits. They might sell short at the peaks and attempt to buy long at the lows. Such actions often end up to be momentum oriented. They watch the trades minute by minute to see if there is any strength as shown by volume. If strength is indicated by larger volume, they hold their position. If the volume declines, they close out their positions and plan their next strategy. Obviously, timing is everything in these speculative strategies.

Long or short term

Buy high, sell higher can work for either the conservative long-term or speculative short-term, strategy. But what either strategy needs is a stock that has a solid reason to go higher in price. Two of the main reasons for a stock price to go higher are anticipated higher earnings or a takeover plan.


III. SELL HIGH, BUY LOW

Sell short at a high price and buy back at a lower price. Wonderful, an investor can make money in a falling market.

Limited gain

A short position can profit only to the amount that a price drops. But in a short position, there is virtually unlimited risk because there is no limit to how high a stock price can go. Eventually, the shares must be bought back or if the investor currently owns the shares, delivered to cover the short position. The potential problem is that if the price does not fall, it might rise higher than the investor can afford to pay.


IV. SELL THE LOSERS AND LET THE WINNERS RUN

It is one of the most important understandings an investor can have about the stock market. It is prudent for an investor to sell stocks that are losing money, stocks that could continue to drop in price and value. It makes equally good sense to stay with stocks that show significant gains, as long as they remain fundamentally strong.

Any price drop is a losing situation. Price drops cost the investor money. They are a loss of profits. In some circumstances the investor should sell, but in other situations the investor should take a closer look before reaching a sell decision.

The determination of whether a stock is still a winner depends on the cause of the price correction. If a price drop occurs because of a weakness in the overall market situation or is the result of a normal daily fluctuation of the stock price, the stock can still be a winner.

If, however, the cause of the drop has long term implications, it could be time to take the loss and move on to another stock. Long term implications could be any of the following:

1 Declining sales

2 Tax difficulties

3 Legal problems

4 An emerging bear market

5 Higher interest rates

6 Negative impacts on future earnings

Any event that has a negative impact on the long term picture of earnings or earnings growth can quickly turn a stock into a loser. Many long and short term investors will sell out their positions and move on to a potential winner.


http://www.omniglot.com/info-articles/dallas/buy_market_price_sell_stock.html

Why do people hold on to losing stocks?

Revisiting a behavioral economics classic: Why do people hold on to losing stocks?

By nudgeblog

Tyler Cowen poses the following question about stocks, and what he says used to be the conventional behavioral economics answer.

Let’s say you bought two stocks last year. One has tanked and looks likely to fall further. One has gone up and you expect it to keep rising. (Hey, it’s not completely impossible.) Which are you more apt to sell?

Behavioral economists used to think they knew the answer: neither. Studies have shown that people tend to value things more – whether shirts, stereos or stocks – once they own them, no matter what has happened to their actual worth. This phenomenon is called the endowment effect. If it were the only psychological factor at work, you’d be reluctant to sell both losers and winners simply because they’re already tucked into your portfolio.

Cowen’s story is incomplete, and therefore unfair, even to old behavioral economists. In the scenario Cowen describes, two biases, each reinforcing the other, would be in effect: The endowment effect and loss aversion. The endowment effects for both stocks (assuming you bought them at the same price) would cancel each other out, but this would not necessarily mean investor paralysis. For more than twenty years, behavioral economists have been citing something called the disposition effect, which is an implication of prospect theory and the component of loss aversion). The status quo purchase price serves a reference point. Gains and losses are perceived relative to some other aspirational level different from the status quo – say, what you thought the stock would rise to. As the winner is closer to this aspiration, you, as the investor, become more risk-averse and therefore more likely to sell it, while holding on to the loser in the hopes of a roaring comeback, even one with a small probability.

But this isn’t the only explanation for identical behavior. An alternative is a commonly mistaken belief among average investors that stocks will revert to their mean. Stocks that have risen will fall; stocks that have fallen will rise. This story also predicts the selling of winners on the expectation that it will fall. Yes, Cowen’s scenarios says you, the ordinary investor, would expect the winning stock to keep rising. Old behavioral economics says you’d be quite extraordinary for believing this. Both of these potential explanations are laid out in Terrance Odean’s classic paper “Are Investors Reluctant to Realize Their Losses?” His data does allow him to distinguish which of the two stories makes more sense.

Addendum: Cowen’s column is actually an appreciation of a paper by Nicholas C. Barberis and Wei Xiong with yet another explanation for why investors sell winners and hold onto losers: That it’s the pleasure of actual (or what stock traders would called realized) gains – the good feeling you get from making a seemingly smart decision – and the pain of actual losses that leads to selling winners. Read the full paper.

http://nudges.wordpress.com/2009/01/29/revisiting-a-behavioral-economics-classic-why-do-people-hold-on-to-losing-stocks/

Tips On How To Maximize Stock Profits

Tips On How To Maximize Stock Profits
By Mark Crisp


When the stock market marches into record territory like it has been, it's tempting to take some shares off the table. The prudent investor, it's been said, will sell his losers and keep his winners. To maximize stock profits, the goal is to keep profits from the winners. Holding onto losing positions, or worse, adding to them, can put a dent in those profits.

Some stocks will buck the trends of their sector or the general market. If there are no buyers for a stock it is probably a good idea to get out of that stock and put your money somewhere else. This means that you need to keep winners, and cut laggards and losing stocks.

Knowing when to buy and sell is probably the most challenging aspect of investing. It's been said that timing is everything, and that's certainly true for small investors who want to maximize stock profits. While there are many systems and methods dedicated to market timing, certain observations can help one make an informed decision.

Investors seek every clue and advantage to know when it is best to buy or sell, and many canny stock traders watch volume. Volume is a simple matter of the total shares traded during a single market day. Modern technology tracks trading volume minute by minute in real time and some use this routinely. An investor can seize an opportunity by using signals like volume because they telegraph changes, and increasing volume is linked to price volatility and the greater the volume, the more likely the prices will also be extremely increased or decreased.

Scaling in and out of positions is an additional way to maximize stock profits. Rather than completely buying in or selling out of a position it is conventionally considered prudent to purchase part of a position as a stock rises, and selling part of it when getting out. In this process the investor knows that they are buying a winner heading up, while not being overly greedy by holding their position for too long when selling time has come.

In today's bull market, there are plenty of high performing stocks to chose from, and getting in at the right time can mean difference between making a little and making a lot.

Maximize stock profits by selling loser stocks and keeping winners. Gut laggards that fail to grow in the sector or the whole market. Timing is everything. Watch for certain key signs when investing, like watch volume. Increasing volume usually mirrors increasing volatility in price. Huge volume days can signal a near term high or low in price. Carefully watch volume signals and daily trading activity to make the best profit possible. Another way to maximize stock profits is by scaling in and out of positions. Buy a winning stock on the way up but do not be too greedy and hold the stock too long.

Article Source: http://EzineArticles.com/?expert=Mark_Crisp

http://ezinearticles.com/?Tips-On-How-To-Maximize-Stock-Profits&id=821183

Avoiding The Avoiding Of Regret

Avoiding The Avoiding Of Regret


Avoiding the emotional pain of regret causes you to sell winners too soon and hold on to losers too long. This causes a loss of wealth from taxes and a bias toward holding stocks that perform poorly.

How can you avoid this pitfall? The first step is to understand this psychological bias. This chapter should help you accomplish this step. Two other steps are helpful:

1. Make sell decisions before you are emotionally tied to the position.

2. Keep a reminder of the avoiding regret problem.


For example, when buying a stock for $100, you should decide at which price you will sell the stock if the price declines. You may decide to sell if the price falls to $90. However, making this decision before the price actually falls is not enough. You must act. You must act in advance, before the stock actually falls and regret starts to take place. How do you accomplish this? Place a stop-loss order. A stop-loss order is an order that tells the brokerage to sell the stock if it ever falls to a predetermined price. A stop-loss order at $90 will cause the stock to automatically be sold if the price falls to $90. This order is placed when the stock is still at $100 and regret has not had a chance to occur.

Another strategy is to make a point of selling enough losers to offset any gains that you might have incurred during the year. Although this can be done any time during the year, you probably feel most comfortable doing this in December. In fact, December is the most common month to take losses for tax purposes. Investors often use the end-of-the-year tax deadline as motivation to sell los­ers. However, losers can be sold at any time during the year to achieve the tax benefits. The reason that tax-loss selling usually occurs in December is that the closer you get to the end of the year, the tax-reduction motive has more influence over investors than the disposition effect.

Finally, keep a reminder of the avoiding regret problem. Consider how many futures traders train to do their jobs. Futures traders often take very risky short-term positions in the market. They can gain or lose large sums of money in minutes or even sec­onds. Some futures traders have told me that they memorized a saying:

You have to love to take losses and hate to take gains.

At first, this saying makes no sense. Why would you hate to take gains? The power of the saying is that it exactly counteracts the disposition effect. The avoidance of regret causes traders to want to hold on to losers too long. "You have to love to take losses" reminds them to sell quickly and get out of a bad position when the market has moved against them. Alternatively, the seeking of pride causes traders to sell their winners too soon. "Hate to take gains" reminds them to not be so quick to take a profit. Hold the winning positions longer than your natural desire for pride would suggest.



IN SUMMARY

To summarize this chapter, you act (or fail to act) to seek pride and avoid regret. This behavior causes you to sell your winners too soon and hold your losers too long. This behavior hurts your wealth in two ways. First, you pay more capital gains taxes because you sell winners. Second, you earn a lower return because the winners you sell and no longer have continue to perform well while the losers you still hold continue to perform poorly.

Wednesday 2 September 2009

Some Investing Principles which cannot be disputed

While it may be true that in the online investing world there is no rule without an exception, there are some principles which cannot be disputed. These principles can help investors get a better grasp of how to approach online investments and nurture them to maturity.

Sell the losers and let the winners keep riding
For long term investing success it is important to ride a winner. Ever so often, investors make profits by selling their appreciated online stocks, but hold onto stocks that have declined in hopes of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice.

If you have a personal preference to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever succeeded.. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.

While riding a winner is important, you also should sell the losers. There is no guarantee that an online stock will bounce back after a long period of decline. While it is important not to underestimate good stocks, it is equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.

In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.

Learn to give a cold shoulder to hot tips
Whether the tip comes from your brother, cousin, neighbor or even online broker, no one can ever guarantee what online stocks will do. When you make an investment, it's important you know the reasons for doing so. Conduct your own research and analysis of any company before you even consider investing your hard earned money. Relying on a hot tip from someone else is not only an attempt at taking the easy way out, it is also a big gamble. Sure, with some luck, tips may sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.

Don't panic when shares experience short-term movements
As a long term online investing strategy, you should not panic when your online investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term.

Day traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

Do not overemphasize the P/E ratio
Investors often place too much importance on the price-to-earning (P/E) ratio in their online investing strategy. It is one key tool among many. Using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is over valued.

Resist the temptation of penny stocks
A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you'd still have a 100% loss of your initial investment. A penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

Stick to your strategy
Online stock investors use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick to it. An investor who switches between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors aiming at long term strategies should avoid.

While these suggestions cover some critical strategies for long-term online investments there is an exception to every rule. Depending on your circumstances, use these principles within the framework of your overall investment strategy, and reap the benefits of long term online investments.


http://www.1einvestonline.com/online-stock-investors.html

Getting Out While the Getting's Good

Getting Out While the Getting's Good
By WALTER HAMILTON
September 18, 1998

When should you sell a stock? If you're bargain hunting in today's dicey market, the answer is sooner rather than later--that is, if the stock moves against you.

The market's summer plunge has made for some good buying opportunities. But it has also made for a risky investment climate in which it's easy to lose money quickly, experts note.

To protect against that, some investment pros say individual investors should take the bold step of jettisoning any stock that falls as little as 8% from the price at which they bought it.

The reasoning: For most of the 1990s' bull market, stocks often bounced back quickly from trouble as a rising tide lifted most boats. But today, a stock that begins to sink may quickly crash--and stay down.

"The very best investors I know have very set parameters for losses," said Jonathan Lee, managing partner at Hollister Asset Management, a money management firm in Century City. "They say: 'I'm going to buy and have very tight risk parameters. If it goes down 5%, I'm out.' "

Dumping a stock that drops 8% or so from your entry price may sound drastic. Even in a good market, prices naturally ebb and flow, and an investor who sells after a small loss could subsequently watch the stock rebound.

Indeed, conventional wisdom is that an investor needn't reexamine a stock unless it declines 15% or more. If a stock has fallen simply because of market sentiment--rather than because of a fundamental change in the company's prospects--traditional thinking says an investor should hold on.

But in a high-risk market like this one, one or two sizable losses can crush a portfolio.

Think about this: If an investor waits to sell a falling stock until the loss is 20%, and then reinvests the proceeds in another stock, that new holding must rise 25% just to recoup the original amount. After a loss of 30%, a fresh holding must climb 43% to get the investor back to even.

*

Some pros take a more basic view of why losers should quickly be sold.

"The best reason why you should not hold [a losing] stock is . . . you've made a mistake," said David Ryan, head of Ryan Capital Management, a Santa Monica-based hedge fund.

Ryan is a onetime protege of William O'Neil, an investment legend and founder of Investor's Business Daily newspaper. O'Neil has long been one of the more vocal proponents of the "8%-loss-and-out" sell rule.

Note that this rule applies only to newly purchased stocks--not to price moves in shares that an investor has owned for a while and that have appreciated in value.

In those cases, assuming you're holding the stock as a long-term investment, interim moves that may erase some of your gain (without reducing your original principal) are OK to ride out, so long as they reflect overall market weakness rather than problems specific to the company.


The conventional thinking about sticking with a stock that falls sharply from your purchase level also misses another point: A stock often turns down before an erosion in the company's fundamentals is readily apparent.

Even the most diligent investors have trouble getting access to the best information. They may not know exactly why a stock is going down, but they can often infer from the action in the shares that the company's outlook is dimming.

"Many times a stock will tell you something bad about the company before anyone else will," said Tom Barry, investment chief at George D. Bjurman & Associates in Century City, which manages $1 billion.

*

But what about the practical issues involved in quickly selling stocks that move against you? True, there are commission costs. And depending on market conditions, an investor may end up taking a large number of losses.

Still, better to take smaller losses than risk that they become major losses, many pros say.

Investment legend Peter Lynch has long noted that investors are likely to make the bulk of their profits in a relative handful of stocks that rise dramatically over time. Most stocks in a portfolio, Lynch has said, will be mediocre or poor performers. Thus, keeping losses to a minimum assures that your few big gainers aren't watered down by big losers.

Indeed, many pros insist that small investors' prime mistake usually is to hold losers too long, hoping to at least break even.

"There are too many companies where things are going great. Why not switch?" Barry said. "There are so many people who don't want to admit a loss, so they hold their losers. We do the opposite. We sell the losers and keep the winners."

Psychologically, the 8%-loss sell rule may be easiest to observe in the case of higher-priced stocks. An 8% drop in a $50 stock is $4, while for a $25 stock it's only $2.

Still, investors should remember to focus on the percentage loss, not the dollar amount.

*

To see the benefit of the 8% sell rule in action, imagine you bought Chase Manhattan at its July 31 peak of $77.56. Let's say you disregarded the sell rule, which would have gotten you out a mere two days later at about $71, as the stock slumped.

You might have figured that Chase, as a blue-chip stock, would be insulated from a sharp drop.

But amid deepening worries about U.S. banks' potential trading and loan losses overseas, Chase shares have plunged to $47.88 now--a drop of 38% from the peak.

It's entirely possible that the fears are overdone and that Chase will emerge unscathed from the current global turmoil.

But it remains to be seen whether an investor who has ridden the stock down will be able to claim the same thing.

*

Times staff writer Walter Hamilton can be reached by e-mail at walter.hamilton@latimes.com.




http://articles.latimes.com/1998/sep/18/business/fi-23902

Tuesday 1 September 2009

Riding the Dot-Com Bubble

Tracking Finances: Riding the Dot-Com Bubble


In the late 90’s when the world was ablaze with dotcom millionaires and it looked as though the stock market could make me wealthy too, I bought a lot of technology stocks — including some start-ups and IPOs (Linux, Red Hat, Pilgrim Technology Fund, EMC and others that I have since become an amnesiac for, thankfully). I rode them all up on a wild ride, and then rode them all down again. When I was tracking finances, I was riding a roller coaster

The actual dollar cost I lost wasn’t too traumatizing, but not selling when the P/E ratios were in the stratosphere was a big mistake that has cost me in the neighborhood of $100,000. To add insult to injury, during this time I came across a beach area lot that I bought, because of its terrific price… but of course, the proceeds I used were from selling my highest-quality investments, and I was left with the speculative garbage or what remained of them. Sell the losers and the low-quality first, and keep the long term winners.

Train Wreck Tuesdays are a weekly post of horrible financial mistakes. They are posted anonymously. Submit your story; if you’re selected, you get a free personal finance book. The best comment gets the same prize! Check out past Train Wreck stories.


http://www.mint.com/blog/train-wreck/tracking-finances-tuesday-train-wreck-dot-com-bubble/

Ride your Winners, Dump your Losers

Ride your Winners, Dump your Losers

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If you are a momentum trader that trade purely on the basis of a surge in price and high trading volume, it is wise to scramble for the exit when the stock loses its momentum. However if you have picked the stock on the basis of its valuation, the fact that it drops more means it is even better value – time to buy more instead of sell. Obviously if the fundamentals (future prospects and changing sector conditions) of the company have deteriorated, you may need to admit your mistake and sell.

This theory sounds more credible than it really is in countering the human tendency to keep the losers. The fact that it identifies a stock as a winner or loser on the basis of the entry price already introduces an element of subjectivity. An emotion free investor would only look objectively at the fundamentals and the valuation of the stock, instead of getting hung up on the entry price.


http://www.italkcash.com/forum/general-stock-market/98561-ride-your-winners-dump-your-losers.html

Never Subsidize Losers With Winners

Never Subsidize Losers With Winners

Professionals and amateurs alike hate selling their dogs. They keep hoping, keep assuming, that a sinking stock is wrong in its direction. They rationalize that the weakness or lack of interest they see is and will be fleeting, and that people soon will recognize the value that the holder sees in the stock.

That's all well and good, until you need money.

Most fund managers have fabulous marketing teams that are able to hype their funds regardless of performance. Despite that and despite the shameless way this industry supports just about anyone who runs money if the money-runner is willing to kick back to the sources of funds, managers do get cash calls. They periodically have to redeem shares they own for cash to send back to unlucky investors.

When they do, that tendency to keep the dogs develops a sinister side: Good stocks get sold to subsidize the losers. You then get a self-fulfilling spiral as the bad stocks stay bad. They usually keep going down. And the fund, without the good stocks, keeps sinking. They never learn my rule:
Never subsidize losers with winners.

Individuals do the same thing. They have only a finite amount of capital to invest. Rather than take the medicine -- the loss -- they hold on to the losers and sell their winners.

My advice to anyone who is stuck in this position is quite simple: Sell the losers and wait a day. If you really want them, go buy them back the next day. I also am certain that you never will.

http://www.thestreet.com/story/10292298/never-subsidize-losers-with-winners.html