Here's a nice article to add to our "Arrgh, it's fallen, but I can't get out" mindset. It's from Gary Smith, at Street.com
Basic #1: The market has no knowledge of your individual position. Here's a question I get a lot: "I'm long XYZ, which I bought at 150. It's now at 100. Should I hold? I mean, isn't XYZ bound to go up?"
Implied in this question, of course, is that XYZ almost has to go up, since it's been down so much! As if the market remembers that hey, you bought it at 150, so you're due for a rebound.
To bring some objectivity to the table, however, what you should do is break the trade down into odds and percentages. As an example, let's say you invested 150K in XYZ. Therefore, it's now worth 100K, meaning you're down 50K. And of course, right or wrong, you'd like to get back to even.
So, in essence, you now want your 100K of equity to earn 50% or 50K.
Okay, that's the goal. The next step is your options, and here's where the mind plays funny tricks. Essentially, you have two choices. You can leave your 100K with XYZ and hope it goes back up 50%. Or, you can invest in any other stock in the universe and hope that goes up 50%.
The trick your mind plays, of course, is that it conveniently forgets about choice No. 2. No, it thinks it somehow has to stick it out with the doggy XYZ.
As a real-life example, let's look at two stocks: America Online (AOL:NYSE), which I reviewed this past Friday, and 4 Kids Entertainment (KIDE:Nasdaq). Let's say AOL was your real-life XYZ and you had ridden it down 33% (meaning you'd need a 50% bounce to get you back to break-even). Unfortunately, there are probably a few people in that situation.
So, on July 27, you look over your options, and go through the aforementioned exercise. Hmmm, are the odds in your favor that AOL will spring back up 50%? Or is there another, stronger stock that has a better shot at rising?
Ah, your eye spies KIDE, and you decide that the Pokemon craze is for real, the stock has been strong, and it even broke recently from congestion. So, you take your 100K and buy 2,836 shares of KIDE. Wow, a few days later, those shares are already up 33%! Meanwhile, AOL is down another 13%
Yes, I know, I went back and found one strong and one weak stock to make my argument look good. But, my point is that there are always alternatives. Usually better alternatives to the dog you're holding now. If you think XYZ will rally, then stick it out. But, if you think there's at least one other stronger stock, then switch horses for a while. Really, the market won't mind. |
