Cutting your losses is liberating

[Trav.]

I came across the following today via twitter and it sums up one of the issues (I have a few) that have plagued me along this journey.

I thought sharing this will help a few to clear out those losers and start looking forward instead of hoping for a miracle to occur with those bottom draw specials.

https://www.thespecinvestor.com.au/blog/cutting-your-losses/

Cutting your losses is liberating

I thought I would share a short post on a very important subject. It’s not short because I don’t have time, rather it’s short because the message is simple. The word “bottom drawer”, or the place where stocks go to gather dust, should not exist in your vocabulary. If you purchased a stock that turned against you and you held it all the way down then you should be cutting your losses rather than holding it with the false hope that one day you are going to breakeven. I say this for the following reasons:

Cutting your losses reason 1
It is emotionally exhausting to look at this stock on a daily basis as a reminder that you completely stuffed up. Every day that you look at this stock you have to deal with the fact that you broke all your rules or the realisation that you didn’t have any rules to start with.

The reason you are in this predicament is you bought a dog stock. Apologies for being so blunt but not good stock gets smashed to the point where you have lost the majority of the capital invested. Now what makes you think this stock which we have now confirmed is a dog, is now going to make some miraculous recovery? Let’s take a look at the below table to see what percentage return you would need to make just to break even. So all these stocks in your bottom drawer are going to need to be multi-baggers just for you to breakeven which isn’t realistic 99% of the time.

Cutting your losses reason 2
The reason you are in this predicament is you bought a dog stock. Apologies for being so blunt but not good stock gets smashed to the point where you have lost the majority of the capital invested. Now what makes you think this stock which we have now confirmed is a dog, is now going to make some miraculous recovery? Let’s take a look at the below table to see what percentage return you would need to make just to break even. So all these stocks in your bottom drawer are going to need to be multi-baggers just for you to breakeven which isn’t realistic 99% of the time.



Cutting your losses reason 3
The opportunity cost of holding this stock is huge. The share market churns through new opportunities all the time, it’s a never-ending cycle. So not only are you not making any money by holding these dog stocks but, but you’re also losing potential profits in other stocks.

You will feel better
The sense of relief when you release dog stocks from their kennels and cut your losses shouldn’t be underestimated. You will feel a huge sense of relief as well a weight being lifted off your chest. Now I am no financial adviser so this isn’t financial advice rather it’s investing common sense. Bite the bullet and cut your losses.

Before you purchase any future stocks though ensure you have an investment strategy and identify the mistakes you made with regards to these particular stocks which put you in this situation, to begin with. If you can do these two things your chances of future success have just gone up exponentially.

To finish off ill share a quote from @steveburns who sums this up perfectly, “10 small losses plus 1 big gain can create wealth. 10 small gains plus 1 big loss can destroy wealth.”

I really encourage you to leave a comment or question if there is anything specific to this post that requires clarification or further discussion. This site wasn’t created to motivate you, it was created to give new investors practical learnings to improve your investing performance. Also feel free to use the “recent post” section in this article to view some of my other articles!

Finally I encourage you to subscribe below so you can be automatically notified whenever I post a new article or release interesting pieces of information.

 

[barney]

I came across the following today via twitter and it sums up one of the issues

Good points Trav, and I hope any newcomers to ASF/the market take heed to the advice.

I agree wholeheartedly on the premise of cutting the "woofers" from the portfolio (Still own the odd puppy myself (Panda imitating a dog! lol)

I think Spec traders are more likely to end up with the odd bottom drawer Stock simply due to the lack of liquidity and potential gaps in the market depth etc. By the time you realise you have stuffed up, you have stuffed up even better than you realised but the advice stands no matter what you trade.

I agree with the sentiment that ...

"The sense of relief when you release dog stocks from their kennels and cut your losses shouldn’t be underestimated. You will feel a huge sense of relief as well a weight being lifted off your chest."

However, there is (or has been in my case) a follow on sense of depression once you cut them loose … simply because you waited so long and lost way more than you should have etc etc (multitude of reasons to be down on yourself)

I suspect I may be close to holding the record on ASF of major stuff-ups as a novice trader (which is the reason I joined so many years ago) … so I truly understand how bad you can actually stuff up if you do something dumb. (Happy to divulge to anyone wanting "good" advice on what not to do)

With all the above in mind …. a couple of simple suggestions for any new or otherwise trader who may be unaware of the perils …

1) Research/practice/get a mentor etc BEFORE you start putting down your hard earned on any trade

2) Don't put too much cash on any one trade until you know how to actually trade

3) Don't borrow money to trade ESPECIALLY before you complete 1) and 2)

Anyone guess what I did wrong many years ago lol

With the Index pumping higher, and unaware punters perhaps seeing nothing but market blue sky, your post may well be very timely Trav.

 

[Trav.]

Excellent post @barney

I think Spec traders are more likely to end up with the odd bottom drawer Stock simply due to the lack of liquidity and potential gaps in the market depth etc. By the time you realise you have stuffed up, you have stuffed up even better than you realised but the advice stands no matter what you trade.

I started out chasing the speccies expecting big profits but ended up with huge losses and in one recent circumstance holding and unable to sell ( realise loss ) due to company being in administration ... but have recently decided to change my stock hunting universe to the XAO with some liquidity filters in the hope that I wont be trapped again.

I was just looking at my trading spreadsheet and noted that my largest win was from a stock purchased at $0.89 and not from my previous favourites in the sub $0.10 range so that is some confirmation that I can be a profitable system trader and not a gambler getting sucked in on ramping from forums or hot tips from co-workers.

1) Research/practice/get a mentor etc BEFORE you start putting down your hard earned on any trade

2) Don't put too much cash on any one trade until you know how to actually trade

3) Don't borrow money to trade ESPECIALLY before you complete 1) and 2)

Guilty on fronts 2 & 3 as well and to some extent I required the lesson as I am pretty slow on the uptake sometimes but I am lucky enough to live another day and learn from my mistakes. Others might not be so lucky and be wiped out in one go and unable to right the ship.

 

[barney]

Guilty on fronts 2 & 3 as well and to some extent I required the lesson as I am pretty slow on the uptake sometimes but I am lucky enough to live another day and learn from my mistakes.

Thanks Trav …

I suspect that we may have had similar yet still possibly totally different "learning curves"

Such is the nature of the market that lessons can be dealt precipitously at either regular or irregular intervals … yet the lesson delivered is invariably similar

 

[So_Cynical]

I have found its a lot easier to sell losers when you have some big winners and are looking to reduce your tax bill, back in May/June i was selling
heaps of losers that i normally wouldn't sell just because i "needed" losers, cost me a few dollars with the current rally but made cents at the time.

 

[barney]

I have found its a lot easier to sell losers when you have some big winners and are looking to reduce your tax bill

Agree S_C ……. (now days)

The difficulty in many punter's situations (mine included originally) is biting off more than you are capable of chewing (for whatever reason) …

The psychological duress of screwing up and losing a shirt (or two) can be/was very hard to come to terms with.

This thread will hopefully be a reminder that precautions/appropriate risk assessment needs to be understood before stepping out to sing with "Elvis" ... prior to getting singing lessons!

 

[sptrawler]

One of my early mistakes Barney, was selling my winners, to make me feel good about hanging on to my losers.
Then I realised what a dick I was, as my winners kept going up and my losers either went nowhere or down.
Now I actually do feel good, cutting away my losers.

 

[barney]

One of my early mistakes Barney, was selling my winners, to make me feel good about hanging on to my losers.
Then I realised what a dick I was, as my winners kept going up and my losers either went nowhere or down.
Now I actually do feel good, cutting away my losers.

Indeed Homer ...... I agree, but I guess the 'point of the point' to anyone with less experience than those like yourself, is recognising the importance of that fact early in their trading journey.

Interestingly, I have had a bad last few weeks or so account wise …. but as part of those losses I was happy to eliminate a couple of "nasties" from the port folio ……

I have not regretted those decisions one bit because whether they go up or down afterwards, you have to 'own' the decision to cut them loose and simply carry on.

Even more telling and hopefully poignant …….. The recent major $$ losses on my account have come from a couple of Stocks I probably should have at least reduced, but instead held onto.

I still ballz up regularly … all part of the journey lol ….

 

[galumay]

Like most things in investing, there are no simple rules that always apply, 2 of my biggest winners, a 5 bagger & a 10 bagger, both looked like dogs for a long time, they fell a long way from my initial postion, but I caught the falling knives and averaged down into them. Losers can be your biggest winners in the long term and selling too soon a terrible mistake.

Remember the old adage, being too early looks the same as being wrong for a long time!

I also am wary of the simplistic, first level thinking about opportunity cost, not selling only turns out to be an opportunity cost if the new home you find for the capital is a winner, if its another loser then selling turns out to be the opportunity cost!

The final bad thinking is the mathmatical nonsense of saying you need to make 100% to recover from a 50% loss. Its nonsense because in maths you cant compare %'s of different amounts, its like comparing apples and oranges. If I lose $1 i have to make $1 to get it back, thats all.

So i suggest not taking a simplistic approach, assess each investment on it's merits and be wary of people who tell you its easy, just follow these rules!

 

[Zaxon]

The final bad thinking is the mathmatical nonsense of saying you need to make 100% to recover from a 50% loss. Its nonsense because in maths you cant compare %'s of different amounts, its like comparing apples and oranges. If I lose $1 i have to make $1 to get it back, thats all.

I don't agree with that paragraph. Sure, you lose a dollar, you need to gain a dollar to get back to zero. But it's also true that $100 with a 50% loss = $50. And $50 with a 50% gain doesn't equal $100. In fact, taking percentages of numbers and comparing them is exactly what math does. There's no "apples" and "oranges" here. It's just the way percentages work.

Perhaps conceptually, you like to think in dollar amounts. That's fine, and useful. It doesn't make the math of percentages untrue though, because you choose not to use it.

I've responded to this post because we have a lot of readers from different backgrounds, and I wouldn't like to see anyone mislead about how percentages work.

 

[sptrawler]

So i suggest not taking a simplistic approach, assess each investment on it's merits and be wary of people who tell you its easy, just follow these rules!

I think that is a good point galumay, there is no easy way to make money, or else everyone would have it.
You either have to learn how to value a company, or learn how to read technical analysis, or a combination of both otherwise you are just gambling.
Someone will no doubt put that in a better context, but the stab in the dark winners only work in a roaring bull market, not in a toppy market. IMO

 

[galumay]

I don't agree with that paragraph. Sure, you lose a dollar, you need to gain a dollar to get back to zero. But it's also true that $100 with a 50% loss = $50. And $50 with a 50% gain doesn't equal $100. In fact, taking percentages of numbers and comparing them is exactly what math does. There's no "apples" and "oranges" here. It's just the way percentages work.

Perhaps conceptually, you like to think in dollar amounts. That's fine, and useful. It doesn't make the math of percentages untrue though, because you choose not to use it.

I've responded to this post because we have a lot of readers from different backgrounds, and I wouldn't like to see anyone mislead about how percentages work.

You actually prove my point, you CANNOT compare %'s of different amounts, its meaningless. As you say 50% of $100 is a completely different number to 50% of $50. Percentages are simply not meant to be used to compare things with different amounts like this, it is specifically comparing apples and oranges.

Maybe it will help you to think about what happens when one investment of $100 goes to $0, then you have lost 100% of the $100 and when you use %'s you would say now I need an infinite % return to get my money back, which is obviously nonsense. You could make a 10% gain on another $1000 investment and you would have got your money back.

Its much better to think in terms of $ returns and losses rather than %'s IMO.

Of course I would argue that I posted this in the first instance because I hate seeing people mislead by the misuse of percentages!

 

[barney]

Perhaps conceptually, you like to think in dollar amounts. That's fine, and useful.

Its much better to think in terms of $ returns and losses rather than %'s IMO.

You are both correct of course

Personally I look more in dollar terms, but the % observation is a good way of highlighting the difficulty of bringing a solitary losing Stock back to life if it has devalued substantially.

By trading a basket of Stocks and spreading the capital around, the % "problem" tends to be filtered.

 

[Gringotts Bank]

If the stock is in a strong uptrend and has good sentiment, it makes sense to average down and attempt to trade your way out of the position for a small loss or break even.

 

[Gringotts Bank]

Someone will no doubt put that in a better context, but the stab in the dark winners only work in a roaring bull market, not in a toppy market. IMO

And it is looking toppy. Speccies are not mean-reverting. That lack of reversion in the small end of town is always telling. Of course it can change in a short period of time (days), but that's how it is at the moment. I've taken a few big losses lately.

 

[Jack Aubrey]

Prompted by this thread, I dumped my small holding in Pantoro (PNR) today for a near 25% loss. I checked the body for vital signs before pressing the button. I still have a few specs on life support, but those seem to be breathing and have a pulse even though they are looking a bit wasted.

When I started trading (all of six months ago!), I set my stops religiously via my broker. After being booted out on some intraday lows, I revised that strategy.

 

[barney]

Prompted by this thread, I dumped my small holding in Pantoro (PNR) today for a near 25% loss.

Interestingly PNR is still my largest holding … It was previously meant to be my long term/faux superannuation holding so I could comfortably retire to the Maldives … or Possum Brush (whichever I could afford at the time)

Anyway, I understand your sale Jack …. It has been a bit of a let down in the last 12 months.

In the context of the thread … PNR is one of my top 3 largest ever profitable trades/investments … yet at the same time is probably currently my 2nd largest ever paper loss from its highs to where it now sits. (Yes that is possible)

There were always reasons not to sell … but in hindsight, I should have sold at least some near the highs, and am now paying the price for my lack of attention to reality …..

Have I learned my lesson ….. I doubt it.

Am I still smiling …. yeah, I guess so

 

[Skate]

Hi @Trav.

Great topic..

Misery of selling a large loss. When the misery of a big loss is suddenly removed by selling the position you'll feel a surge of energy - the weight will be lifted and you might be surprised at how readily you can find other opportunities that will help you make up your loss.

Selling is a valuable tactical tool. Selling a stock is by far the most valuable tactical tool that the individual investor has at their disposal. Selling is cheap and easy and can be undone in the blink of an eye. Too many seem to think that if they sell a stock, they are somehow prevented from buying it back again. Not so..

Punching Bag. No matter how smart we are, or how hard we work, we will regularly be hit by news, circumstances, and developments that are unforeseen and unknowable. The stock market gods will periodically use us for their entertainment, and there is nothing we can do to prevent it, so we have to be ready and mentally prepared.

Skate.

 

[aus_trader]

When I started trading (all of six months ago!), I set my stops religiously via my broker. After being booted out on some intraday lows, I revised that strategy.

I also used to do this a long time ago. Cost me a fair bit to realise that I'd be better off making decisions end of day when it comes to deciding if the stock has actually reversed to the down side or had an intra-day low and back to normal.

Only downside is if a stock has a huge down day and if the on-market stop could've taken you out of the position earlier. These tend to be less common and I take these on the chin and generally sell at the end of the day or following day since the damage is already done.

The other thing is, Even an on-market stop loss cannot protect you if the stock gaps down on that big down day !

 

[Miner]

I came across the following today via twitter and it sums up one of the issues (I have a few) that have plagued me along this journey.

I thought sharing this will help a few to clear out those losers and start looking forward instead of hoping for a miracle to occur with those bottom draw specials.

https://www.thespecinvestor.com.au/blog/cutting-your-losses/

good one Trav