As from April 2013 my Journey in Investing is to create Retirement Income for Life till 80 years old for two over market cycles of Bull and Bear.

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Wednesday, 1 June 2011

Cut losses - The Truth, The Pain, and The Chance!

I hate losses in stocks so I don't have stop-loss; but that HATE doesn't prevent me from cutting losses in stocks.  Painfully, I did it a few times! Bo pian.


Stop Loss


Stop loss is when you pre-determine your own exit price to take the loss and walk away. It is just one of those bad trades and it is not that painful as the loss tends to be smaller.

Cut Loss

Cut loss is different from Stop Loss. Cut loss is when you felt so hopeless at the falling stock price and it has reached your threshold of pain. You bite your finger and sell it and move to the sideline for a while. Cut loss is usually bigger and more painful.


Read? More posts related to stop losses

When to cut losses?

When you still have some fund left to invest in other stocks; your opportunity cost for staying in paper losses is actually very low i.e. you are just missing out the saving rate of less than 1% in the bank.

But, when you run OUT of cash to invest; then it has become a different story. Your opportunity cost are now costly as you are potentially missing out some promising stocks in the market that can help you to make a meaningful recovery in your portfolio.

No Money. No New Stocks.
No New Stocks. No Chance for Recovery.

How to change Horse?

Only when you have spotted a potential promising horse (oops, don't be wrong again) that may help you to recover faster; then you cut losses. This is Change Horse strategy. You can't expect your dying horse to suddenly wake up and start running.  When you switch horse, you have to ensure that the quantity of shares remain the same or more; otherwise the rate of recovery will be slower.

For example, you are cutting losses on 10,000 shares of HW; then you have to switch to a better horse of 10,000 or more to retain the rate of recovery with the new horse. Get it?

2 comments:

  1. Very good & interesting.
    And someone's mother, who is a stock broker has advised to get out of junk share holdings as fast as possible; to put whatever funds accumulated into the next promising "horse", like you said.
    She encourages one to do this until one's portfolio look quite healthy & prosperous.
    But it's really easier to say then to do.
    Nevertheless, we have to try because if not the junk stocks will stay with you for a very, very long time.
    I know. i have plenty of junk stocks after collecting for 23+ years.
    But some "junk stocks" give very good dividend leh. i suppose to compensate you for buying and holding them. What to do with this kind of junks? Anyone, any suggestion?

    ReplyDelete
  2. Hi,

    I guess the answer is this, what did you buy the stock for ?

    Let us say, i bought capitaland at $4, i wanted to turn it into $5, i can see it has fallen to $3.

    I can see another stock, say, Keppel Land which i feel will go up to $5, from $4.

    Right, i make the switch.

    That is, i guess the cut loss strategy.

    However, whether it will is another story, right cw?

    ReplyDelete

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