Showing posts with label missed profit loss. Show all posts
Showing posts with label missed profit loss. Show all posts

Wednesday 13 January 2010

Losses are painful. Understand them.

http://myinvestingnotes.blogspot.com/2009/11/when-should-stock-be-sold.html

In a portfolio of good quality stocks bought at fair or bargain price, there are usually few reasons for selling. However, the businesses of these companies need to be tracked regularly and their quarterly results announcements followed.

When should a stock be sold?
  • Firstly, if the fundamentals of the stock are deteriorating, the stock should be sold urgently. 
  • Another good reason would be when the stock is overpriced.
Be alert when the PE of the stock has risen by more than 50% above its usual average PE.

Reappraise the fundamentals and valuations of this stock, in particular, its future earnings growth potential.

It maybe timely to cash out on a portion or all of a stock if
  • the present high PE cannot be justified or
  • if the present high PE has run ahead of the fundamentals of the stock.

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http://myinvestingnotes.blogspot.com/2009/11/types-of-stock-market-losses.html

Types of Stock Market Losses
There is no person who likes losing money. However, you should accept the idea of losing some money from time to time. Additionally, whenever you notice that your stocks are losing their positions and their long-term prospects are not good, it may be better to sell them and move on to a better deal.

Types of losses 
  • Capital loss
  • Lost opportunity
  • Missed profit loss
Stock investing is not insured against losses. Just on the contrary, losing in the stock market is part of the game with which you should become used to. If you still haven't lost any money you haven't been enough time in the stock market and your turn will come sooner or later. On the other hand, you may have already sustained some losses, but haven't been able to recognize them since they come in a variety of forms.

Capital loss
One of the simplest forms of losing in the stocks market is by selecting and purchasing a stock whose price starts to gradually fall. At a certain point you decide that you have seen enough. You sell the stock and live with the realised losses. This loss is commonly referred to as capital loss. It involves loss of actual dollar amount. Aside from offsetting huge profits for tax purposes, capital losses may be used as a lesson to avoid committing the same mistakes in the future.

Lost opportunity 
Another type of loss is the so called lost opportunity. It is less painful than the capital loss, but still has its implications and negative effects. The lost opportunity loss represents the investment you could have made with the money you have locked in a stock that haven't brought you any profits. Even though you haven't lost any dollars from the stock that you have purchased and remained at the same price levels, you could have used the same money for other investment purposes, which could have brought you profits. Even a savings account in a bank would have returned you some money. The lack of movement on the part of the stock means that you are losing money. Even if the stock's price doesn't drop you are sustaining opportunity loss.

Missed profit loss
Missed profit loss results when the investor watches the rising of the price of a stock. When it reaches its top the price starts to fall. The investor has missed the top point at which s/he could have made a profit. Instead, s/he hopes that the stock will resume its high levels. However, this rarely happens and even if it happens it will doubtfully be the same level as the one reached at first.

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All the above losses are painful experiences.  Investors, being human, avoid pain and may not be rationale in dealing with losses. For example, investors may sit on paper losses when in fact it will be better for them to take the loss and move on.
 
The rapid rise in the stock market since March 09 too has caused pain to a particular group of investors.   They are those who are not in the market before the rise or those who sold their stocks too early only to see them rising up and up later in the recent bull run.  For some, this lost opportunity, akin to investing in a "stock named cash" which did not rise in price relative to another stock, can be painful too.  Due to the large increase in stock prices the last few months, some investors opined that this large lost opportunity, though usually less painful, can be very intense.  How can these investors avoid such 'lost opportunity' pain?
 
He can reason that it is better to be safe giving a miss to some good investments rather than be sorry ploughing into a stock and realising a loss.  He can also rationalise that realising his profits pocketing the cash make him more comfortable and pleasure than risking a missed profit loss or actual capital loss sometime in the future. 

A strategy used by some investors is to sell partially, rather than totally when the stock price has risen substantially.  How does this benefit them?  You need not sell stock just because its price has fallen or risen.  It is probably their hedge to minimise the pain that can arise from missed profit loss or "lost opportunity" loss.  Should the price of the stock rises, he still has some stocks riding the upside, thereby reducing "lost opportunity" pain.  On the other hand, when the price of the stock falls, he has already cashed out some profits, thereby reducing missed profit loss.  He can even picked up the same stocks cheaper with his cash. 

Understanding losses and your emotional responses to these are important.  You need to understand these to make good decisions and to avoid making bad decisions in your investments in the face of uncertainties.