Showing posts with label Sell the losers. Show all posts
Showing posts with label Sell the losers. Show all posts
Tuesday 1 September 2009
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.
Friday 21 August 2009
Ride Your Winners, Dump Your Losers
Ride Your Winners, Dump Your Losers
www.mastersuniverse.net
Assume that you have invested into two stocks - Stock A and Stock B. You made 50% on Stock A and lost 50% on Stock B. If you need to liquidate one stock to get some cash, which stock would you sell? It is human nature for people to take profits on Stock A and keep the losing trade until Stock B rebounds. Chances are Stock A is so wonderful that it will keep going up after you sold, and Stock B will keep going down and your loss becomes bigger. The bigger your loss, the more reluctant you are to sell and eventually you will end up with a bunch of losers.
Ride Your Winners
Momentum Trading
According to the “Ride Your Winners, Dump Your Losers” theory, if you manage to fight off your human nature and keep the winners instead of the losers, you will make money. This seems to fit in well with the theory of momentum trading – buy the strongest stocks with the highest momentum, i.e. the stocks that are increasing quickly on higher volume than the market. Disciplined momentum traders would buy with the flow of the market, if a trade goes against them, they would sell without hesitation. They follow the market trend with no question ask.
As the theory goes, you should not be emotionally attached to your trade. If you have invested in a dud, you should just admit your mistake and cut the loss. This theory sounds credible and sensible.
Value Investing
This theory may make sense for a short-term momentum trader, but it certainly does not make sense for a long-term value investor. Assuming that you have done your homework and the two stocks were the same valuation at the time of investment, the fact that Stock A has gone up and Stock B has gone down means that Stock A is now far more expensive than Stock B. A prudent value investor would switch out of the expensive Stock A and switch into the much better valued Stock B, provided the fundamentals of the two stocks have not changed.
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?
Winners Always Outperform Losers?
The key question in deciding whether this is a valid theory is whether winners are more likely to outperform the losers? If that is the case, the same group of winners should always dominate the world economy. Taking the component stocks of the Dow Jones Industrial as examples, which are the winners of the winners. Do these blue chip winners always outperform the market? Looking at the original dozen component stocks of the Dow in 1896:
American Sugar Now Domino Foods, Inc., part of Sweden’s Assa Abloy
American Cotton Oil Now Bestfoods, part of Unilever
North American Company Electric company broken up in the 1940s
Chicago Gas
Now a subsidiary of Integrys Energy Group, Inc
Laclede Gas Still in operation as The Laclede Group
National Lead Now NL Industries
Tennessee Coal & Iron Swallowed by U.S. Steel
American Tobacco Broken up into Fortune Brands and R.J. Reynolds
Distilling & Cattle Feeding Predecessor of Millennium Chemical, part of LyondellBasell
U.S. Leather Liquidated in 1952
U.S. Rubber Company Merged with B.F. Goodrich, now part of Michelin
General Electric Only one that is still around
The only company that you may still recognize is General Electric (even General Electric has been dropped from the Dow for 9 years). The rests have either been taken over or wound up. Had your great great grandpa set up a family trust to invest in these winners 100 years ago, there would probably not be a lot inheritance left for you.
In fact, some academics have noticed the opposite effect - “the small stock anomaly”. For example, Rolf W. Banz has shown that smaller companies (which tend to include a lot of “losers”) from 1926 to 1980 outperformed the larger companies.
The Winner Takes It All
It Really Comes Down to Your Trading Style
Ultimately it really depends on your trading style. 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.
www.mastersuniverse.net
Assume that you have invested into two stocks - Stock A and Stock B. You made 50% on Stock A and lost 50% on Stock B. If you need to liquidate one stock to get some cash, which stock would you sell? It is human nature for people to take profits on Stock A and keep the losing trade until Stock B rebounds. Chances are Stock A is so wonderful that it will keep going up after you sold, and Stock B will keep going down and your loss becomes bigger. The bigger your loss, the more reluctant you are to sell and eventually you will end up with a bunch of losers.
Ride Your Winners
Momentum Trading
According to the “Ride Your Winners, Dump Your Losers” theory, if you manage to fight off your human nature and keep the winners instead of the losers, you will make money. This seems to fit in well with the theory of momentum trading – buy the strongest stocks with the highest momentum, i.e. the stocks that are increasing quickly on higher volume than the market. Disciplined momentum traders would buy with the flow of the market, if a trade goes against them, they would sell without hesitation. They follow the market trend with no question ask.
As the theory goes, you should not be emotionally attached to your trade. If you have invested in a dud, you should just admit your mistake and cut the loss. This theory sounds credible and sensible.
Value Investing
This theory may make sense for a short-term momentum trader, but it certainly does not make sense for a long-term value investor. Assuming that you have done your homework and the two stocks were the same valuation at the time of investment, the fact that Stock A has gone up and Stock B has gone down means that Stock A is now far more expensive than Stock B. A prudent value investor would switch out of the expensive Stock A and switch into the much better valued Stock B, provided the fundamentals of the two stocks have not changed.
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?
Winners Always Outperform Losers?
The key question in deciding whether this is a valid theory is whether winners are more likely to outperform the losers? If that is the case, the same group of winners should always dominate the world economy. Taking the component stocks of the Dow Jones Industrial as examples, which are the winners of the winners. Do these blue chip winners always outperform the market? Looking at the original dozen component stocks of the Dow in 1896:
American Sugar Now Domino Foods, Inc., part of Sweden’s Assa Abloy
American Cotton Oil Now Bestfoods, part of Unilever
North American Company Electric company broken up in the 1940s
Chicago Gas
Now a subsidiary of Integrys Energy Group, Inc
Laclede Gas Still in operation as The Laclede Group
National Lead Now NL Industries
Tennessee Coal & Iron Swallowed by U.S. Steel
American Tobacco Broken up into Fortune Brands and R.J. Reynolds
Distilling & Cattle Feeding Predecessor of Millennium Chemical, part of LyondellBasell
U.S. Leather Liquidated in 1952
U.S. Rubber Company Merged with B.F. Goodrich, now part of Michelin
General Electric Only one that is still around
The only company that you may still recognize is General Electric (even General Electric has been dropped from the Dow for 9 years). The rests have either been taken over or wound up. Had your great great grandpa set up a family trust to invest in these winners 100 years ago, there would probably not be a lot inheritance left for you.
In fact, some academics have noticed the opposite effect - “the small stock anomaly”. For example, Rolf W. Banz has shown that smaller companies (which tend to include a lot of “losers”) from 1926 to 1980 outperformed the larger companies.
The Winner Takes It All
It Really Comes Down to Your Trading Style
Ultimately it really depends on your trading style. 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.
Flip the losers, let the winners run
Thursday, April 2, 2009
Sell the losers, let the winners run
Why selling is a common problem
Published: 2009/02/04
Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.
* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.
So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html
Sell the losers, let the winners run
Why selling is a common problem
Published: 2009/02/04
Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.
* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.
So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html
Saturday 28 February 2009
Why You Should Sell
Why You Should Sell
By Brian Richards and Tim Hanson February 20, 2009 Comments (74)
I can be just as dumb as anybody else. -- Peter Lynch, September 2008
Peter Lynch earned near-30% annual returns running Fidelity Magellan from 1977 to 1990. He's sold millions of books, raised millions for charity, and holds the rare distinction of having a Motley Fool Global HQ conference room named after him.
But in September 2008, Peter Lynch also had the ignominious honor of holding both AIG (NYSE: AIG) and Fannie Mae (NYSE: FNM) in his personal portfolio -- as they dropped 82% and 76%, respectively, during that month alone.
Ouch.
For those of us who have spent our investing careers trying to match the great Peter Lynch … well, if you lost 80% in September, then congratulations -- you did it! If you did better than negative 80%, then you beat the great Peter Lynch.
Invest like Peter Lynch We kid, of course, and we're in no way demeaning Lynch or his illustrious career. Rather, we're just pointing out how hard it's been to avoid a flameout lately. When the blue-chip S&P 500 has dropped some 40% over the course of a year, you know it's bad.
And when companies like Boeing (NYSE: BA) and Adobe Systems (Nasdaq: ADBE) drop more than 50% in the course of a year -- even though they're historically strong operators that appear to have little to do with the crisis on Wall Street -- you know it's rough out there for pretty much everyone.
In other words, even if you don't own AIG or Fannie, you probably own a stock like AIG or Fannie. We sure do. Brian, for example, has ridden Whole Foods Market (Nasdaq: WFMI) from $40 to $12, while Tim has watched pump-maker Colfax sink from $20 on down to $10. Ahem.
We are not aloneAnd while there are many stocks that will recover from this market downturn, it's likely we're all continuing to hold stocks that won't. New research, from Professors Nicholas Barberis and Wei Xiong of Yale and Princeton Universities, gives a name for this tendency. We're exhibiting "realization utility."
Realization utility encourages investors to hang on to stocks that have sunk -- even when those stocks have dim futures. Here's how they explain it:
The authors consider an additional experimental condition in which the experimenter liquidates subjects' holdings and then tells them that they are free to reinvest the proceeds in any way they like. If subjects were holding on to their losing stocks because they thought that these stocks would rebound, we would expect them to re-establish their positions in these losing stocks. In fact, subjects do not re-establish these positions.
That's right. If we force-sold all of your stocks and gave you the cash to reinvest, would you buy the stocks we had just sold? Odds are, you wouldn't.
So, why would you hold on to stocks that you don't think will recover? We'll let the good professors give it to you straight:
Subjects were refusing to sell their losers simply because it would have been painful to do so … subjects were relieved when the experimenter intervened and did it for them.
Wait a second
But aren't we the guys who pounded the table two years ago about how individual investors like us sell winners too early, missing out on life-changing multibagger gains to lock in a modest return? "Quick trigger fingers aren't rewarded," we wrote at the time.
And that's still true. But down markets like this one present an enormous long-term opportunity for investors … only so long as you're willing to do some selling.
See, when stocks are expensive, we may invest in mediocre stocks because they look cheap, while passing on superior operators because they're too expensive. Today, however, those superior operators are all down double digits at least.
Google (Nasdaq: GOOG), for example, dropped more than 50% in 2008. Dream stock Microsoft (Nasdaq: MSFT) -- given its growth, FCF-generating abilities, competitive advantages, and bulletproof balance sheet -- has a P/E in the single digits!
In other words, now is the time to upgrade your portfolio.
Why you should sell
You should always sell when you have a better place to put your money -- and today, a host of superior companies are on sale. The takeaway, then, is to recognize when realization utility may take root, take a sober view of your holdings, and take advantage of this down market to upgrade your portfolio. Ten years from now, you'll be very glad you did.
We're both looking to take advantage of current prices in foreign markets -- which have been hammered even worse than our own S&P 500.
Brian Richards owns shares of Microsoft and Whole Foods Market (still). Global Gains co-advisor Tim Hanson owns Colfax. Microsoft is a Motley Fool Inside Value recommendation. Google is a Rule Breakers selection. Whole Foods is a Stock Advisor pick. The Motley Fool has a disclosure policy.
Read/Post Comments (74)
http://www.fool.com/investing/international/2009/02/20/why-you-should-sell.aspx
Some interesting comments:
On February 20, 2009, at 11:03 AM, DargFool wrote:
I love the statement, "You should always sell when you have a better place to put your money".
I give that a capital DUH. The problem is identifying when one place is better than another. Presumably the losing positions you are holding were "better places to put your money" at the time you bought them.
The buy and hold investors basically say, hey, we have no chance of identifying which investments will do better than the other, so we will get our returns by trading infrequently.
The value investors say, We only buy quality cheap, and we think we can differentiate between cheap quality and cheap crap.
The growth investors say, We can't tell what it's worth, but if it is moving in the right direction, then by a fallible application of Newton's law, a stock price in motion tends to stay in motion.
The financial planners say, everything is a gamble so you have to a million small bets instead of a few large bets. And by the way, here is your bill.
The traders and talking heads say, Buy my computer trading system, its models have been tested in all market conditions, and it generates returns of 23% (your results may vary).
The hedgers say, I don't know which way its going to move, but if it moves a lot I win.
The average investor says, "Damn, screwed again. I paid that CEO 10 million to LEAVE the company after I got a 90% loss. Great job Board of Directors, you are really on top of things!". I am taking what's left of my money and buying a beer. At least I can enjoy that.
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Report this Comment On February 20, 2009, at 6:04 PM, Redbird95 wrote: Great but even "safe" stocks continue to drop. I can see the sell but buy now? I thought GE was a great bargin at $15 (down from $35) now it is $9 (another 40% down) with a yield of 13% but will it go to $6? Sometimes ridding a new purchase down is worse than seeing the old ones sink.
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On February 21, 2009, at 12:13 AM, TradeNakedOption wrote: The high dividends on quality companies like GE look great. But if you get 10% and the stock drops 20%, you are not doing your account any good.
My bias is to be neither short nor long the market. I talk more about this with options on my blog:
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Report this Comment On February 21, 2009, at 12:39 AM, truthisntstupid wrote: No thanks. One of my picks did get crushed but I liked it then and I'll like it again. Be stupid to sell it because its down then decide ten years from now that I like it again and buy in again higher - now wouldn't it? It's still the same company, still has a wide moat, still an iconic brand - and long-term prospects are no worse now than they were when i picked it. If more people thought for the truly long term when they buy (buy and KEEP) they would find that it forces you to think a lot differently and put a lot more time and consideration into choosing companies they would have unshakeable confidence in even when something like this happens.
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Report this Comment On February 22, 2009, at 11:14 AM, truthisntstupid wrote: Samscreek
some of these people don't seem to realize what long term is. I buy with no plans on ever selling and it forces me not to try to capitalize on short-term movements. To me it's the difference between gambling & investing.
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Report this Comment On February 22, 2009, at 11:35 AM, ReillyDiefenbach wrote: Investing in stocks is ALWAYS a gamble.
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Report this Comment On February 22, 2009, at 12:01 PM, truthisntstupid wrote: True. But is my investing for dividends in companies like P&G and PEP and various utilities gambling to the same extent as people trying to capitalize on short-term price movements? I read the "Intelligent Investor" and like the mental perspective of taking the view that I'm buying "a piece of a business" instead of a number whose volatility might give me a profit. Love Ben Graham for the mental aspect of what that book teaches yet I'm not really a "value investor."
I'm more of a dividend investor that believes in the ownership viewpoint that Ben Graham teaches
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On February 23, 2009, at 2:19 PM, Ecomike wrote: I stayed out of the market for 20 years, got back in in October as I started to see stocks on sale. So far I have been up, down and even, right now about even, which means I am holding about twice as much stock as I had 4 months ago. I sold NCX today at 300% profit on an Arab (Dudais, UAE?) Take over, taking it private at a 300% premium over last weeks closing pricing. They are buying and we are selling. SIRI got a private (Non-gov) bail out last week, stock tripled in one day. Trick is buy stocks that get hammered huge.
I feel pretty good as I am even with my peak value from last year as of today, with the market at a new bottom.
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Report this Comment On February 27, 2009, at 3:15 PM, kpmom wrote: See when I see things like this, I wonder why I ever subscribed to the Motley Fool publications, and am glad I canceled my subscriptions. Y'all rode your stocks down 40%, 50%, 60%, and MORE??? Why????
And you guys have the nerve to CHARGE for your "reccomendations"? This is the problem with the MF's "buy and hold" forever mentality. Do you realize how long it will take to make those losses up (if ever), never mind moving ahead? I follow IBD's reccomendation to cut all losses at 7-8%. And don't tell me about Buffett's buy and hold strategy. He's a zillionaire. Most of the rest of us are not. Shame on you all for not advising your follows to PRESERVE CAPITAL at all costs. For we workin' stiffs it's the name of the game
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Report this Comment On February 27, 2009, at 3:56 PM, JoeyBallz wrote: Hey whiney guys that are bitching about losing their money on stock recommendations from Fool. Just because they each recommend a stock to buy each month doesn't mean that you should go out right then and there and buy it. There are dozens of underlying factors that you need to consider before just buying whatever a newsletter says (No, I'm not going to explain them to you, go read a book). If you've been buying every recommendation they've given you for the past year, you're going to be down 50% from where you started. That's what happens in a recession. The knife is still falling and will continue to until the nation regains confidence. If you try to catch a falling knife when it's got a heavy weight behind it, you're going to get cut... well your money is at least. If you think just because they recommend a stock that means you're going to make money on it right away or in the middle of a recession you're either retarded, a Hillbilly that never finished getting their GED or you just shouldn't be investing at all. These recommendations are mostly stocks to buy and HOLD so that once a bull market makes a comeback (who knows when that will be), these stocks will rebound better than most stocks out on the market (If you haven't checked, their recommendations are doing much better than the market itself). Don't blame Fool.com because you don't understand the basic concepts of investing. If stocks give you too much of a tummy ache and you're selling them once you've already lost 50% of your money try out some nice mutual funds or ETFs.
P.S. If you still want to go on and make blind thoughtless investments, please be my guest. You're only helping me build my own wealth. Happy trading! :-)
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Report this Comment On February 27, 2009, at 4:48 PM, truthisntstupid wrote: I can't hope to say it better than joeybalz
most of you whiners had no business subscribing to a newsletter til you first invested that same money in a copy of "The Intelligent Investor", some good books on dividend investing, and maybe at least a first-year college textbook on accounting principles.
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On February 27, 2009, at 4:49 PM, garyanton wrote: My own approach is to only invest in securities which yield substantial dividends or interest - i.e preferred shares, income trusts, MLPs, CEFs, bonds, etc. I avoid common shares because of what many people above have complained about - I have no idea where "the market" is heading. While portfolio values can still get crushed if companies fail to pay a dividend or go bankrupt (I held both Lehman Bros bonds and Freddie Mac preferred shares and incorrectly thought they were utterly solid), overwhelmingly companies continue to pay. Yields right now are often extraordinary and the steady, generally predictable cash flow sure beats the guesswork of timing the market.
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Report this Comment On February 27, 2009, at 5:25 PM, biglittleone wrote: My first stock purchase was in 1952. Anyone have earlier first exposure to risks of markets?
I sold it before being drafted into the army in 53. Next purchase was after graduating from college in 1960. Still have some of the ofspring of this purchase.
Since then I have had many more gainers than losers.
I will probably buy some more in the next several weeks.
It helps to be debt free in a paid for house.
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On February 27, 2009, at 5:41 PM, rwk2008 wrote: Most of us (including me) have tended to give stock pickers far more credit for clairvoyance than they deserve. TMF doesn't know how the market will behave, doesn't know which stocks have solid base and which are mostly hot air. TMF picks a few stocks they THINK might perform better than the market in the short to medium term (think a month or two to a couple of years). If the market drops 50% and their stock drops 45%, in some limited sense they were right. When everything was booming, and bubbles were expanding, it wasn't hard to be a hotshot stock picker. In today's market, it takes a lot more digging and long-term perspective to get it reasonably right most of the time. And you don't get that with a couple of guys pumping out lots of stock picks every week.
One thing to remember - unless you think the market is going a lot lower, don't be a net seller of stocks. If you expect a recovery in the next year or two, pick some stocks YOU expect to hold up and do well, and put some money into them. They probably won't be the ones that have almost completely collapsed (like CITI, BofA, Fannie and Freddi, and GM). They also may not be the ones that have dropped less than the rest. You have to consider the source and value of the advice, and make up your own mind. Remember Warren Buffet took a loss on Level 3, Bill Gross is surprized at the dept of the recession, and Peter Lynch had big bucks in AIG last year. And most of the multi-million per year investment bankers were betting on toxic real estate 'securities' up until last summer. Nobody gets it right more than about 2/3 of the time.
I see a lot of posters who want to bring the neo-con republican wing nuts back to run Washington. Hello! What part of ran the country into depression do you not get? If a republican tells you it is night, go to the window and check. They haven't been right for a long time, probably since Teddy Roosevelt left office. They've given us two major depressions in less than 100 years, and they still haven't given up on trying to kill social security, medicare, and the American labor movement, three of the progressive ideas that made our country great and built the middle class most of us are a part of.
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On February 27, 2009, at 9:56 PM, InvestingShar wrote: It seems that there fewer and fewer real investors left in the world every day now. But there are so many gamblers!..Buy today hoping it's going to go up and sell tomorrow to get some return in case it'll go down.
These are shares of the company we are talking about here. We are owning part of the company!
A lot of speculations, a lot of misleading information, a lot useless articles, a lot of bad news out there right now.
But the true investor beleives in the concept of the stock market, the concept of trading, the concept of investing. The true investor buys value cheap. And this is the time, gentlmen! This is the time to get on the board, fasten your setbelts and enjoy the journey for the next 2-5 years. And once the world economy is telling you: It's going good. - you have to sell everything you've got and wait for the next time like NOW!
By Brian Richards and Tim Hanson February 20, 2009 Comments (74)
I can be just as dumb as anybody else. -- Peter Lynch, September 2008
Peter Lynch earned near-30% annual returns running Fidelity Magellan from 1977 to 1990. He's sold millions of books, raised millions for charity, and holds the rare distinction of having a Motley Fool Global HQ conference room named after him.
But in September 2008, Peter Lynch also had the ignominious honor of holding both AIG (NYSE: AIG) and Fannie Mae (NYSE: FNM) in his personal portfolio -- as they dropped 82% and 76%, respectively, during that month alone.
Ouch.
For those of us who have spent our investing careers trying to match the great Peter Lynch … well, if you lost 80% in September, then congratulations -- you did it! If you did better than negative 80%, then you beat the great Peter Lynch.
Invest like Peter Lynch We kid, of course, and we're in no way demeaning Lynch or his illustrious career. Rather, we're just pointing out how hard it's been to avoid a flameout lately. When the blue-chip S&P 500 has dropped some 40% over the course of a year, you know it's bad.
And when companies like Boeing (NYSE: BA) and Adobe Systems (Nasdaq: ADBE) drop more than 50% in the course of a year -- even though they're historically strong operators that appear to have little to do with the crisis on Wall Street -- you know it's rough out there for pretty much everyone.
In other words, even if you don't own AIG or Fannie, you probably own a stock like AIG or Fannie. We sure do. Brian, for example, has ridden Whole Foods Market (Nasdaq: WFMI) from $40 to $12, while Tim has watched pump-maker Colfax sink from $20 on down to $10. Ahem.
We are not aloneAnd while there are many stocks that will recover from this market downturn, it's likely we're all continuing to hold stocks that won't. New research, from Professors Nicholas Barberis and Wei Xiong of Yale and Princeton Universities, gives a name for this tendency. We're exhibiting "realization utility."
Realization utility encourages investors to hang on to stocks that have sunk -- even when those stocks have dim futures. Here's how they explain it:
The authors consider an additional experimental condition in which the experimenter liquidates subjects' holdings and then tells them that they are free to reinvest the proceeds in any way they like. If subjects were holding on to their losing stocks because they thought that these stocks would rebound, we would expect them to re-establish their positions in these losing stocks. In fact, subjects do not re-establish these positions.
That's right. If we force-sold all of your stocks and gave you the cash to reinvest, would you buy the stocks we had just sold? Odds are, you wouldn't.
So, why would you hold on to stocks that you don't think will recover? We'll let the good professors give it to you straight:
Subjects were refusing to sell their losers simply because it would have been painful to do so … subjects were relieved when the experimenter intervened and did it for them.
Wait a second
But aren't we the guys who pounded the table two years ago about how individual investors like us sell winners too early, missing out on life-changing multibagger gains to lock in a modest return? "Quick trigger fingers aren't rewarded," we wrote at the time.
And that's still true. But down markets like this one present an enormous long-term opportunity for investors … only so long as you're willing to do some selling.
See, when stocks are expensive, we may invest in mediocre stocks because they look cheap, while passing on superior operators because they're too expensive. Today, however, those superior operators are all down double digits at least.
Google (Nasdaq: GOOG), for example, dropped more than 50% in 2008. Dream stock Microsoft (Nasdaq: MSFT) -- given its growth, FCF-generating abilities, competitive advantages, and bulletproof balance sheet -- has a P/E in the single digits!
In other words, now is the time to upgrade your portfolio.
Why you should sell
You should always sell when you have a better place to put your money -- and today, a host of superior companies are on sale. The takeaway, then, is to recognize when realization utility may take root, take a sober view of your holdings, and take advantage of this down market to upgrade your portfolio. Ten years from now, you'll be very glad you did.
We're both looking to take advantage of current prices in foreign markets -- which have been hammered even worse than our own S&P 500.
Brian Richards owns shares of Microsoft and Whole Foods Market (still). Global Gains co-advisor Tim Hanson owns Colfax. Microsoft is a Motley Fool Inside Value recommendation. Google is a Rule Breakers selection. Whole Foods is a Stock Advisor pick. The Motley Fool has a disclosure policy.
Read/Post Comments (74)
http://www.fool.com/investing/international/2009/02/20/why-you-should-sell.aspx
Some interesting comments:
On February 20, 2009, at 11:03 AM, DargFool wrote:
I love the statement, "You should always sell when you have a better place to put your money".
I give that a capital DUH. The problem is identifying when one place is better than another. Presumably the losing positions you are holding were "better places to put your money" at the time you bought them.
The buy and hold investors basically say, hey, we have no chance of identifying which investments will do better than the other, so we will get our returns by trading infrequently.
The value investors say, We only buy quality cheap, and we think we can differentiate between cheap quality and cheap crap.
The growth investors say, We can't tell what it's worth, but if it is moving in the right direction, then by a fallible application of Newton's law, a stock price in motion tends to stay in motion.
The financial planners say, everything is a gamble so you have to a million small bets instead of a few large bets. And by the way, here is your bill.
The traders and talking heads say, Buy my computer trading system, its models have been tested in all market conditions, and it generates returns of 23% (your results may vary).
The hedgers say, I don't know which way its going to move, but if it moves a lot I win.
The average investor says, "Damn, screwed again. I paid that CEO 10 million to LEAVE the company after I got a 90% loss. Great job Board of Directors, you are really on top of things!". I am taking what's left of my money and buying a beer. At least I can enjoy that.
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Report this Comment On February 20, 2009, at 6:04 PM, Redbird95 wrote: Great but even "safe" stocks continue to drop. I can see the sell but buy now? I thought GE was a great bargin at $15 (down from $35) now it is $9 (another 40% down) with a yield of 13% but will it go to $6? Sometimes ridding a new purchase down is worse than seeing the old ones sink.
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On February 21, 2009, at 12:13 AM, TradeNakedOption wrote: The high dividends on quality companies like GE look great. But if you get 10% and the stock drops 20%, you are not doing your account any good.
My bias is to be neither short nor long the market. I talk more about this with options on my blog:
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Report this Comment On February 21, 2009, at 12:39 AM, truthisntstupid wrote: No thanks. One of my picks did get crushed but I liked it then and I'll like it again. Be stupid to sell it because its down then decide ten years from now that I like it again and buy in again higher - now wouldn't it? It's still the same company, still has a wide moat, still an iconic brand - and long-term prospects are no worse now than they were when i picked it. If more people thought for the truly long term when they buy (buy and KEEP) they would find that it forces you to think a lot differently and put a lot more time and consideration into choosing companies they would have unshakeable confidence in even when something like this happens.
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Report this Comment On February 22, 2009, at 11:14 AM, truthisntstupid wrote: Samscreek
some of these people don't seem to realize what long term is. I buy with no plans on ever selling and it forces me not to try to capitalize on short-term movements. To me it's the difference between gambling & investing.
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Report this Comment On February 22, 2009, at 11:35 AM, ReillyDiefenbach wrote: Investing in stocks is ALWAYS a gamble.
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Report this Comment On February 22, 2009, at 12:01 PM, truthisntstupid wrote: True. But is my investing for dividends in companies like P&G and PEP and various utilities gambling to the same extent as people trying to capitalize on short-term price movements? I read the "Intelligent Investor" and like the mental perspective of taking the view that I'm buying "a piece of a business" instead of a number whose volatility might give me a profit. Love Ben Graham for the mental aspect of what that book teaches yet I'm not really a "value investor."
I'm more of a dividend investor that believes in the ownership viewpoint that Ben Graham teaches
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On February 23, 2009, at 2:19 PM, Ecomike wrote: I stayed out of the market for 20 years, got back in in October as I started to see stocks on sale. So far I have been up, down and even, right now about even, which means I am holding about twice as much stock as I had 4 months ago. I sold NCX today at 300% profit on an Arab (Dudais, UAE?) Take over, taking it private at a 300% premium over last weeks closing pricing. They are buying and we are selling. SIRI got a private (Non-gov) bail out last week, stock tripled in one day. Trick is buy stocks that get hammered huge.
I feel pretty good as I am even with my peak value from last year as of today, with the market at a new bottom.
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Report this Comment On February 27, 2009, at 3:15 PM, kpmom wrote: See when I see things like this, I wonder why I ever subscribed to the Motley Fool publications, and am glad I canceled my subscriptions. Y'all rode your stocks down 40%, 50%, 60%, and MORE??? Why????
And you guys have the nerve to CHARGE for your "reccomendations"? This is the problem with the MF's "buy and hold" forever mentality. Do you realize how long it will take to make those losses up (if ever), never mind moving ahead? I follow IBD's reccomendation to cut all losses at 7-8%. And don't tell me about Buffett's buy and hold strategy. He's a zillionaire. Most of the rest of us are not. Shame on you all for not advising your follows to PRESERVE CAPITAL at all costs. For we workin' stiffs it's the name of the game
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Report this Comment On February 27, 2009, at 3:56 PM, JoeyBallz wrote: Hey whiney guys that are bitching about losing their money on stock recommendations from Fool. Just because they each recommend a stock to buy each month doesn't mean that you should go out right then and there and buy it. There are dozens of underlying factors that you need to consider before just buying whatever a newsletter says (No, I'm not going to explain them to you, go read a book). If you've been buying every recommendation they've given you for the past year, you're going to be down 50% from where you started. That's what happens in a recession. The knife is still falling and will continue to until the nation regains confidence. If you try to catch a falling knife when it's got a heavy weight behind it, you're going to get cut... well your money is at least. If you think just because they recommend a stock that means you're going to make money on it right away or in the middle of a recession you're either retarded, a Hillbilly that never finished getting their GED or you just shouldn't be investing at all. These recommendations are mostly stocks to buy and HOLD so that once a bull market makes a comeback (who knows when that will be), these stocks will rebound better than most stocks out on the market (If you haven't checked, their recommendations are doing much better than the market itself). Don't blame Fool.com because you don't understand the basic concepts of investing. If stocks give you too much of a tummy ache and you're selling them once you've already lost 50% of your money try out some nice mutual funds or ETFs.
P.S. If you still want to go on and make blind thoughtless investments, please be my guest. You're only helping me build my own wealth. Happy trading! :-)
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Report this Comment On February 27, 2009, at 4:48 PM, truthisntstupid wrote: I can't hope to say it better than joeybalz
most of you whiners had no business subscribing to a newsletter til you first invested that same money in a copy of "The Intelligent Investor", some good books on dividend investing, and maybe at least a first-year college textbook on accounting principles.
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On February 27, 2009, at 4:49 PM, garyanton wrote: My own approach is to only invest in securities which yield substantial dividends or interest - i.e preferred shares, income trusts, MLPs, CEFs, bonds, etc. I avoid common shares because of what many people above have complained about - I have no idea where "the market" is heading. While portfolio values can still get crushed if companies fail to pay a dividend or go bankrupt (I held both Lehman Bros bonds and Freddie Mac preferred shares and incorrectly thought they were utterly solid), overwhelmingly companies continue to pay. Yields right now are often extraordinary and the steady, generally predictable cash flow sure beats the guesswork of timing the market.
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Report this Comment On February 27, 2009, at 5:25 PM, biglittleone wrote: My first stock purchase was in 1952. Anyone have earlier first exposure to risks of markets?
I sold it before being drafted into the army in 53. Next purchase was after graduating from college in 1960. Still have some of the ofspring of this purchase.
Since then I have had many more gainers than losers.
I will probably buy some more in the next several weeks.
It helps to be debt free in a paid for house.
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On February 27, 2009, at 5:41 PM, rwk2008 wrote: Most of us (including me) have tended to give stock pickers far more credit for clairvoyance than they deserve. TMF doesn't know how the market will behave, doesn't know which stocks have solid base and which are mostly hot air. TMF picks a few stocks they THINK might perform better than the market in the short to medium term (think a month or two to a couple of years). If the market drops 50% and their stock drops 45%, in some limited sense they were right. When everything was booming, and bubbles were expanding, it wasn't hard to be a hotshot stock picker. In today's market, it takes a lot more digging and long-term perspective to get it reasonably right most of the time. And you don't get that with a couple of guys pumping out lots of stock picks every week.
One thing to remember - unless you think the market is going a lot lower, don't be a net seller of stocks. If you expect a recovery in the next year or two, pick some stocks YOU expect to hold up and do well, and put some money into them. They probably won't be the ones that have almost completely collapsed (like CITI, BofA, Fannie and Freddi, and GM). They also may not be the ones that have dropped less than the rest. You have to consider the source and value of the advice, and make up your own mind. Remember Warren Buffet took a loss on Level 3, Bill Gross is surprized at the dept of the recession, and Peter Lynch had big bucks in AIG last year. And most of the multi-million per year investment bankers were betting on toxic real estate 'securities' up until last summer. Nobody gets it right more than about 2/3 of the time.
I see a lot of posters who want to bring the neo-con republican wing nuts back to run Washington. Hello! What part of ran the country into depression do you not get? If a republican tells you it is night, go to the window and check. They haven't been right for a long time, probably since Teddy Roosevelt left office. They've given us two major depressions in less than 100 years, and they still haven't given up on trying to kill social security, medicare, and the American labor movement, three of the progressive ideas that made our country great and built the middle class most of us are a part of.
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On February 27, 2009, at 9:56 PM, InvestingShar wrote: It seems that there fewer and fewer real investors left in the world every day now. But there are so many gamblers!..Buy today hoping it's going to go up and sell tomorrow to get some return in case it'll go down.
These are shares of the company we are talking about here. We are owning part of the company!
A lot of speculations, a lot of misleading information, a lot useless articles, a lot of bad news out there right now.
But the true investor beleives in the concept of the stock market, the concept of trading, the concept of investing. The true investor buys value cheap. And this is the time, gentlmen! This is the time to get on the board, fasten your setbelts and enjoy the journey for the next 2-5 years. And once the world economy is telling you: It's going good. - you have to sell everything you've got and wait for the next time like NOW!
Monday 20 October 2008
3 exceptions to sell the losers rule
Value, in terms of growth potential, is based on earnings and earnings growth.
Analysis of earnngs and news about a company can give some insight into the quality of earnings.
If management has increased earnings by firing half the company's personnel, or the increase is derived from closing several facilities, the quality of the increase is not as valuable as it would be if it reflected improved sales and other revenues.
Slash-and-burn strategies can lead to a further decline in productivity, resulting in additional weakness in earnings and eventually lower prices for the stock.
On the positive side, drastic cuts can force companies to become more efficient, thereby increasing the quality of earnings, which may lead to higher stock prices.
The investor must analyse the company's growth and observe the stock price in action. From the analysis, the investor can determine whether the value of a stock is more likely to:
The analysis can be difficult at times because a winner can temporarily take on the appearance of a loser.
Three situations:
Exception 1: Daily Price Fluctuations
Stock prices fluctuate up or down in day-to-day trading. A glance at any daily price chart will show what may be considered normal daily fluctuations for any individual stock. Stock prices also move from one trading range to another.
For example, a stock price could have a daily fluctuation of $30 to $35 but could occasionally move to $40 and then drop back to the $30 to $35 range. The trading range would be considered $30 to $40. When the stock moves up and begins fluctuating between $40 and $55, it is trading in a new, higher range.
The trading ranges and daily fluctuations can be readily observed on a price pattern cahrt. The investor should take the time to become familiar with these trading ranges and fluctuations from the preceding few months.
Familiarity with price movements will help the investor differentiate between a normal fluctuation and a breakout to a new trading range.
If a lower stock price is within the normal range, it may still be a winner, even if the investor is experiencing a small loss - assuming that the initial analysis showed the stock to be a winner in earnings and growth. Therefore, the kind of weakness seen in a normal fluctuation does not indicate that the time to sell out and take a loss has arrived.
Exception 2: Market Decline
A significant drop in the overall stock market can force the price of a winner to lower levels. All stocks can eventually look like losers, and some will become losers.
Most often these severe market corrections are a time for concern, but not panic.
As we have seen in recent years, the stock market can drop 100, 200, or more than 500 points and recover quickly. Stocks that were winners before the correction will likely be winners agains when the market recovers.
In October 1987, the Dow Industrials dropped more than 508 points (22.6%). Looking back in 2004, that is still the largest percentage drop in one day. Merck & Company had already been showing some weakness, but on the sharp correction on October 19, it dropped from $11.00 to $8.50, a significant $1.50. This correction was an overall market reaction. For Merck, the weakness of the market in late 1987 was an excellent buying opportunity. It began a quick recovery, and by April 1988, after prices were adjusted for a stock split, Merck was trading above $9.00 a share.
In a Continuing Decline
If the market correction is sudden and appears to stabilize in just a few days, it may be best to hold a position and even consider buying more shares of the same stock. Many investors recognized the severe correction in 1987, for example, as a buying opportunity. Although the Dow remained volatile, it reached new highs in early 1989.
Unless they are severe and extend over a few weeks and months, market corrections do not necessarily turn winners into losers.
If a market decline continues, however, the investor should consider selling and moving the funds to the sideline. Extended market corrections are bear markets where stock prices decline and interest rates rise.
Exception 3: Price Advance Followed by a Weakness
A significant upward move to a new trading range, followed by some price weakness, is a fairly normal occurrence. As a stock price makes a major upward movement, many investors will begin to take profits.
Although there is nothing wrong with taking profits, the upward price movement might have only just started. Even so, it is inevitable that some profit taking will occur, and the stock price that has risen to new highs will show some downward price correction.
A signal is given if a stock begins to fall lower than its daily trading range and the overall market is unchanged or advancing.
If a stock price that normally trades between $45 and $50 a share drops to $43 and then to $40, it is time to be concerned. The signal is even stronger if the stocks of comparable companies are not showing a similar weakness.
It is a signal to either sell the stock or find out the reason for the price decline.
Analysis of earnngs and news about a company can give some insight into the quality of earnings.
If management has increased earnings by firing half the company's personnel, or the increase is derived from closing several facilities, the quality of the increase is not as valuable as it would be if it reflected improved sales and other revenues.
Slash-and-burn strategies can lead to a further decline in productivity, resulting in additional weakness in earnings and eventually lower prices for the stock.
On the positive side, drastic cuts can force companies to become more efficient, thereby increasing the quality of earnings, which may lead to higher stock prices.
The investor must analyse the company's growth and observe the stock price in action. From the analysis, the investor can determine whether the value of a stock is more likely to:
- increase,
- remain flat, or
- begin to decline.
The analysis can be difficult at times because a winner can temporarily take on the appearance of a loser.
Three situations:
- daily price fluctuations,
- market declines, and
- price advances followed by weaknesses
can make a winner appear to look weak, but they are not necessarily a signal to begin selling. These are usually temporary situations and are therefore exceptions to the sell-the-losers rule.
Exception 1: Daily Price Fluctuations
Stock prices fluctuate up or down in day-to-day trading. A glance at any daily price chart will show what may be considered normal daily fluctuations for any individual stock. Stock prices also move from one trading range to another.
For example, a stock price could have a daily fluctuation of $30 to $35 but could occasionally move to $40 and then drop back to the $30 to $35 range. The trading range would be considered $30 to $40. When the stock moves up and begins fluctuating between $40 and $55, it is trading in a new, higher range.
The trading ranges and daily fluctuations can be readily observed on a price pattern cahrt. The investor should take the time to become familiar with these trading ranges and fluctuations from the preceding few months.
Familiarity with price movements will help the investor differentiate between a normal fluctuation and a breakout to a new trading range.
If a lower stock price is within the normal range, it may still be a winner, even if the investor is experiencing a small loss - assuming that the initial analysis showed the stock to be a winner in earnings and growth. Therefore, the kind of weakness seen in a normal fluctuation does not indicate that the time to sell out and take a loss has arrived.
Exception 2: Market Decline
A significant drop in the overall stock market can force the price of a winner to lower levels. All stocks can eventually look like losers, and some will become losers.
Most often these severe market corrections are a time for concern, but not panic.
As we have seen in recent years, the stock market can drop 100, 200, or more than 500 points and recover quickly. Stocks that were winners before the correction will likely be winners agains when the market recovers.
In October 1987, the Dow Industrials dropped more than 508 points (22.6%). Looking back in 2004, that is still the largest percentage drop in one day. Merck & Company had already been showing some weakness, but on the sharp correction on October 19, it dropped from $11.00 to $8.50, a significant $1.50. This correction was an overall market reaction. For Merck, the weakness of the market in late 1987 was an excellent buying opportunity. It began a quick recovery, and by April 1988, after prices were adjusted for a stock split, Merck was trading above $9.00 a share.
In a Continuing Decline
If the market correction is sudden and appears to stabilize in just a few days, it may be best to hold a position and even consider buying more shares of the same stock. Many investors recognized the severe correction in 1987, for example, as a buying opportunity. Although the Dow remained volatile, it reached new highs in early 1989.
Unless they are severe and extend over a few weeks and months, market corrections do not necessarily turn winners into losers.
If a market decline continues, however, the investor should consider selling and moving the funds to the sideline. Extended market corrections are bear markets where stock prices decline and interest rates rise.
Exception 3: Price Advance Followed by a Weakness
A significant upward move to a new trading range, followed by some price weakness, is a fairly normal occurrence. As a stock price makes a major upward movement, many investors will begin to take profits.
Although there is nothing wrong with taking profits, the upward price movement might have only just started. Even so, it is inevitable that some profit taking will occur, and the stock price that has risen to new highs will show some downward price correction.
A signal is given if a stock begins to fall lower than its daily trading range and the overall market is unchanged or advancing.
If a stock price that normally trades between $45 and $50 a share drops to $43 and then to $40, it is time to be concerned. The signal is even stronger if the stocks of comparable companies are not showing a similar weakness.
It is a signal to either sell the stock or find out the reason for the price decline.
Sunday 19 October 2008
Sell the Losers and Let the Winners Run
"Sell the Losers and Let the Winners Run"
"Cut your losses and let your profits run." (Daniel Drew, 1800)
The concept is sound. In fact, 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.
But just what is a loser?
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 situatio 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:
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.
"Cut your losses and let your profits run." (Daniel Drew, 1800)
The concept is sound. In fact, 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.
But just what is a loser?
- Is it any price drop from the high?
- Is a stock a loser ony if the investor is actually in a loss position - that is, when the current price is below the original purchase price?
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 situatio 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:
- Declining sales
- Tax difficulties
- Legal problems
- An emerging bear market
- Higher interest rates
- 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.
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