Don't want to prod the fear but today is probably a good day to wheel this article out - see if you can get to the bottom of this list without taking a loss:
Its time to go on holiday
The trend at the moment is firmly down and if you believe our only guide whilst in a free falling market (the technical analysts) it is going to continue to go down.
When I was working at Nomura in London in the 1980's and the market collapsed, the head of the trading desk sent four traders on holiday for a month to stop them trading. He told them to go and play golf. They did. He saved the firm a fortune. But before you do the same you have to clean up, decide what's OK in the long term and take losses on the rest.
But taking a loss is very hard. According to one academic study it is three times harder to sell a stock at a loss than a profit. The aversion to loss is three times more powerful than the desire for profit. That's why it takes three times as long to build confidence as it does to lose it. Its why markets always got up slowly and down sharply. It is because losses have three times the emotional impact of a gain.
It all boils down to human nature. To Emotion not maths. Emotion is a problem for Mum and Dad investors. When you are physically sweating at your loss, when you are concerned that this one is so bad you can't tell your spouse, are you in any fit state to be making a decision?
No....so you need a rule or a mechanism to eliminate the confusion and make the decision for you. To do what we are all so bad at. Taking a loss.
You will find that loss taking is very cleansing.
It is one of the hardest things for a broker to convince himself, let alone a novice trader, to take a loss. So we have developed arguments to persuade you (they don't seem to work on ourselves). They include the following. If ever you are having trouble taking a loss, if ever you are not enjoying your trading, are getting emotional and the stock is still in your possession...read this list. You will have put the sell order on before you get to the end:
- If a stock is going down it is far more likely to continue going down than it is to turn on a sixpence to suit you.
- The further a stock falls the more intense the selling becomes as higher losses cause more selling decisions....so sell early...an early loss is the smallest loss.
- If you sell 10 falling stocks....as any technical trader will tell you....it will be the right thing to do in 9 cases....but you will only remember the other one.
- If you sell now....you are no longer exposed....all you have to do is come to terms with the loss.
- If you sell now you can always buy it back....and who knows you might buy it back lower than you sold it.
- If you sell now you enter the eye of the storm. All becomes calm. You have a moment to think. You can watch from a distance and think. You can always choose to enter the storm again and if you do you will be thinking more clearly and be armed with a plan.
- If you are making a loss on a stock, think to yourself...if I had cash would I buy this stock now at this price....no?....then why are you holding it? Sell it. (Most people begin to 'hate' the stocks they lose money in...so this argument always works).
- Your state of mind has a value. What would your spouse pay (or you pay) to have you care free at the weekend instead of ripping the heads off the kids. Look after yourself....there are not that many weekends in the year or your life....don't ruin too many of them by keeping risky loss making positions until Monday because you didn't have the guts to sell them on Friday.
- Averaging down is a mug's game....if you have money to invest you should be putting it in the best investment in the whole world...do you really think that that is going to be the very same stock you have already bought at a higher price and that is falling at the moment. Very very unlikely. You already have an exposure as well....why do you need more of something that has already proved itself to be a dog.
- Averaging down is what broker's advise you to do to distract you from the fact that they have put you in something that has lost you money. Do you really want to turn a short term trade into a long term loss. Every day you see it in your portfolio. Every day it will be flashing "You idiot". There is a value to avoiding that.
- The quickest way to become a long term investor is to make a short term trade and get it wrong.
- There is no logic in being emotional about losses. Do what most brokers do with their own shareholdings.They have an Excel spreadsheet linked to live prices monitoring all their holdings and what they are worth. At the bottom of the page is a total of what all the holdings are worth now. That clicks over every second all day. Up $500 down $500. This figure is the only truth. This is what the shares are worth. What you paid for the shares is irrelevant....so why care about whether it is a profit or a loss. It is an amount of money. If its gone its gone....period...it is no more likely to come back because you paid a higher price. (There are still clients who will tell you they have $50,000 in Telstra when the holding is worth $25,000....you do not have $50,000 in Telstra.... you have $25,000).
- Most clients who have loss making stocks will tell you that they "hate XYZ". So why hold it. Far better to put the cash in something that you want to wake up to in the morning than something that depresses you.
- If in doubt...sell it....it crystallises a capital loss for this tax year. Why wait until the end of the year to take your losses. Taking losses today could set you up for making and taking gains this year. You can always buy it back once you've made the sale.
Hopefully you hold good long term stocks and won't have to take a loss...and maybe Tinkerbell and Peter Pan are running your portfolio.
Marcus Padley is a stockbroker with Patersons Securities and the author of the daily stockmarket newsletter Marcus Today. For a free trial of the Marcus Today newsletter please go to http://www.marcustoday.com.au/webpages/156_home.php.