Here is why it is important to cut your losses early.
The match of losses goes like this: If you lose 10% on a stock, then it will take an 11% rise to break even. Given the volatility and general moves, that could be very feasible. But if you lose 33% on a stock, then it has to go up 50% before you break even, and very few stocks have 50% swings.
So at some point you have to decide whether or not you want to fight the tape because that is the only way you could make money from a stock is racking up losses (also known as averaging down). Anyone who knows me at all knows that I prefer to average up rather than average down. Why? Because the trend reflects the collective wisdom of the market. When you are fighting the tape, you are in essence saying that you know something that hundreds of thousands of other people (some of whom are much more experienced than you with greater resources) don't know. That is unlikely.
There are legitimate reasons for fighting the tape, but those are very specific.
#1 You have to have a long term thesis that ironclad. This in itself is very rare. For example, I remember when Chargepoint was all the rage and many intelligent people swore by CHPT. Have a look at its chart, and importantly, have a look at its fundamentals. That thesis about private charging stations becoming the EV gas pumps never happened. In other words, the long term thesis was not ironclad. And you don't have to limit yourself to new tech. IBM went through a decade or more of not going anywhere even as computers proliferated. And INTC is unlikely to ever justify anyone who bought and held it near its peak.
So what does an ironclad thesis look like? Usually it is an asset play. If someone has a gold mine or an oil well or major real estate and that sector is now out of favor, then if you patient, perhaps it will pay off.
#2 You need to make sure that the company will still be around when the winds of fortune change. This too is trickier than you may think. Once upon a time there was a company called Novel Networks. They had a lot of customer base and a lot cash. But they decided to take Microsoft on head on and buy every software company that offered a competing Microsoft product. My friends and I used to joke that Novel was the secret cemetery where apps went to die.
So this one means having enough cash and the ability to lower costs and importantly having a management that is focused on surviving until the situation changes.
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What brings this about? I fought the tape on LAC and racked up 30% losses. My wife got very angry with me. I said, LAC is going to get government funding, and even if they don't, the lithium is not going anywhere. They will just wait it out and someone will give them enough money to extract the metal went the prices go up. When that happens, it will take off like a rocket.
Today that thesis came true. I made better than 50% profits.
But even so, it is not something that I had to do. I've made much more with stocks that have held a steady trend and gone up while I kept adding to them. |
