Minorejoy:
This is my first post on this thread, an excellent thread I might add, one I am enjoying reading and learning from.
I have been a relatively active trader for nearly two years. I have had some good times, followed by some awful times, and this year has been very good.
I understand that you are an investor and not a trader, and so I will try to temper my unsolicited advice to you from an investment standpoint. Traders MUST preserve capital, and therefore MUST cut losses quickly. My biggest mistakes have been not taking a quick and small loss, my smartest trades have been getting out of losing trades quickly. I have learned the hard way that the next opportunity always lies around the corner, and to be stuck on a sinking ship precludes you from boarding the next ship that may be destined for paradise.
Now to gear my words to one who is investing. First of all, in hindsight, you may have wanted to wait for an opportunity which seasonally offered a better opportunity for reward. Getting into the market in mid July, at least for the past few years, has not proven to be a good time to start. Some speak to the concept of dollar cost averaging, in other words, taking 1/12 of one's investment capital and putting that into the market each month, thereby averaging one's cost basis over time. Something to consider.
Now what has really caused me to want to respond to your post is your feeling that you will not sell at any cost. When I read that, I was truly ALARMED. Investors should view the PRESERVATION OF CAPITAL no differently than traders, the only difference is that the threshhold of risk tolerance can be slightly higher with investors than with traders. Basically, one rule of thumb that I have seen used is that a trader should never risk more than 2% of his/her trading capital on a trade (personally, I set that threshhold much lower for myself, and yes, I get stopped out of many trades that turn around and become winners, but I try my best to minimize every loss - and still make more mistakes than I should). Investors are advised not to take more than a 7-8% loss on a particular investment. So if you buy a stock for $100, you should consider exiting the position if the stock goes below $92. Now some will argue that in the world of technology stocks, this is a close stop and could be triggered in a day. Well, if I was investing, I would rather take the 8% loss and move on, even if the stock went back up, then watch my stock move even lower. Here is why, and it is based on simple mathematics.
Let's take that $100 stock, and let us assume that the stock takes a 20% dip and moves to $80 and you are still holding it. In order for that stock to make it back to $100, your stock has to go back up by 25%, more than the 20% that it declined by. If the stock had gotten a 50% haircut and had been marked down to $50, now you need a double (100% increase) to get back to even. The bigger the drop, the more the increase to get back even. If the stock had dipped to $93 (7% decrease), it would have to go back up by 7.5% to get back even, not much of a difference.
To me, this is why even an investor needs to be VERY CAREFUL about MANAGING RISK. Do not feel bad if you sell at a loss. You will get another chance, believe me. I have seen my trading portfolio double at one time, only to go down to 25% of its original value, and bounce back from that level to 400% of its original value, and this is a roller coaster that has occured over less than 2 years. I have also managed to take an investment portfolio and run it down to 40% of its original value and take it back up to 140% of its original value.
If you are CAREFUL, you will do fine. But in my opinion, the biggest part of being careful is to PRESERVE CAPITAL and the only way to PRESERVE CAPITAL is to MINIMIZE LOSSES.
I wish you the best of luck, and I am sure you will do great. Thanks for the opportunity to post here amongst some excellent contributors, I have really enjoyed reading the posts here.
David |
