Frank, there's nothing wrong with being wrong. We all make plenty of mistakes, I know I do. (That's why they invented erasers.)
Where too many people screw up is that they don't correct the mistakes immediately. They let small mistakes turn into big mistakes and then they need a miracle to get back to even. This is what I have referred to in the past as ... the drawdown.
For example: RIG has been one of the better performers in the sector. RIG is now off 15% from it's recent high. RIG must now provide a 17% return from today's close just to get back to where it was a few weeks ago.
A return of 20% in a year is a great return and RIG has lost almost that much in a few weeks, and needs to nearly gain that much back to get back to where it was. These percentages add up!
stockcharts.com[h,a]daclyiay[d20050128,20050428][pb50!b20!f][vc60][iut!Lah10,30,5!Lc20]&pref=G
BRY has now dropped 29.5% from its recent highs. We now must see a 42% return to get back to the recent highs. These are incredible numbers to overcome.
stockcharts.com[h,a]daclyiay[d20050128,20050428][pb50!b20!f][vc60][iut!Lah10,30,5!Lc20]&pref=G
(This exercise applies to nearly every energy stock, I'm only using these two as an example.)
Too many people ignore the drawdown. They think, I'm up 60%, what's a 20% pull back? What if it doesn't stop at 20%? A 20% pull back needs a 25% profit to get back to the starting point. Not to mention, 20% in a year is a good return. Why give up a 20% return if one doesn't have to. There isn't any law that says we can't buy back a stock when the trading environment is more conducive to a successful trade.
Anyone can enter a stock. The real test of the investor or trader is knowing when to take profits and when to correct mistakes. We're all going to make mistakes, the key is in keeping them small.
dabum |
