Stock Market Video
Is There Such a Thing as “Too Late to Sell?”
This Week’s Fortune Cookie
In Case You Missed It
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Stock Market Video
In this week’s Stock Market Video, I look at the worried state of the market—investors are on edge about what’s happening (or not happening) in Greece, biting their fingernails about Fed policy and feeling insecure about what’s happening in China. All in all, it’s a good time to be defensive, but also a time to be looking around for the bargains the market is setting up that will bloom when the weather improves. I have a few favorites that present nice packages of fundamentals, business plans and technical charts.
Is There Such a Thing as “Too Late To Sell?” Markets are all about buying and selling, and the market itself will happily let you know if your strategy, your tactics, your rules and your intuitions are up to the task.
But year in and year out, the lesson the market is fondest of teaching is about selling. I know, I know, you’re probably weary of investing experts who always want to talk about when to sell. It’s the Great Mystery for novice growth investors and the Prime Directive for veterans.
Is There Such a Thing as “Too Late To Sell?”
And to illustrate the problem, I will refer to a question I got recently from an investor. Her question was, “Is it too late to sell XYZ stock?” The stock in question had fallen off a ledge and was heading for the pavement, but she hadn’t sold it.
When I asked why she hadn’t sold, she said that her loss limit on the stock was 15% below her buy price, but she had missed her chance to sell then. And she didn’t want to sell now because she now had a 30% loss, which was too big. So she wondered if it would be okay if she held on until the stock was back at a 15% loss and then sell it.
There are so many things wrong in that strategy that I don’t even know where to start. But such thinking is so common that I’ve got to try.
First, a 30% loss in a stock in free fall can easily become a 40% loss, or even more. (The theoretical limit is 100%, although that only happens in a bankruptcy.) The whole idea of having a loss limit is to control the risk of incurring a bigger loss. And in this investor’s case, that bigger loss was still possible.
Second, in addition to the vanished capital that the loss represented, this investor was sitting in a stock that was bleeding out, while there were many growth stocks doing quite well that she could have been holding. If you’re holding a loser when you could be investing in a winner, that kind of risk is called “opportunity risk.” When there’s a good investment you’re missing out on while your bad investment ties up your money, that’s an expensive lesson.
Third, and this is the one that really drives me nuts, this investor’s idea of waiting to sell until her loss was back at 15% meant that she fully intended to sell a stock that was in an uptrend. Think about it: She bought the stock at 100, and should have sold at 85, but held until the stock was at 70 (her 30% loss). But she intended to hold on until the stock had rallied back to 85, which would be a 21% gain from its low point. Any stock that has appreciated 21% off its low is in an uptrend (at least short-term). And one great lesson of growth investing is that you don’t sell stocks in uptrends (except for taking partial profits or a few other, very specific, situations).
Taking losses is mentally hard. But it’s the one indispensible discipline for growth investors. A huge loss blows a hole in your portfolio that can swallow up the good results from several winners. Keeping losses small is the only way to let your winners shine.
Miss Manners, the nom de plume of the droll and savvy etiquette master Judith Martin, used to say that parents have only two tools to use in raising their children: nagging and example.
So if it seems like I’m nagging you about purging your losers, I can claim that Miss Manners told me to.
Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.
This Week’s Fortune Cookie
“Eighty percent of success is showing up” -- Woody Allen
Tim’s comment: It’s hard to create a meaningful, lasting quotation with only seven words, but Woody did it by accident, in an interview. And the reason he did it is that he was (and still is) a very hard worker. He showed up.
Paul’s comment:
This reminds me of Wayne Gretzky’s observation, “I miss 100% of the shots I don’t take.” If you want to enjoy the results of competing, you have to be in the game. You may win and you may lose, but you will have a lot to do with the outcome, with your practice, your intelligence and your hard work. If you don’t show up … not so much.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Cabot Wealth Advisory 7/6/15 – A Great Vacation Stock
In this issue, Tim Lutts, Chief Analyst of Cabot Stock of the Month, lays out his contrarian reasons for being bullish on the stock market. Stock discussed: Carnival (CCL).
Cabot Wealth Advisory 7/7/15 – The 10 Commandments of Dividend Investing
Cabot Dividend Investor’s Chief Analyst, Chloe Lutts Jensen, lays down the law with 10 rules for handling your income stocks.
Cabot Wealth Advisory 7/9/15 – What Caused the Chinese Market Crash?
In this issue, I write about why Chinese markets have been so blood-curdlingly volatile, and what investors should expect from them in the future. (Hint: it’s impossible to say.) Stock discussed: Seaspan (SSW).
Have a great weekend,
Paul Goodwin
Chief Analyst, Cabot China & Emerging Markets Report
Learn more about Paul’s advisory here!
