Learning To Take Losses.

Here is a great informative article on “How to take losses.” This comes with the kind permission of “Wintermule” a regular contributor to ” Topstocks”

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You can get there by clicking on “Topstocks” in Links on the right hand side of this page,where you will be offered a “FREE” Pro account for one month at no obligation to you at any time.

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Now to this great post.

Wintermute of Topstocks on “Learning to take losses.”"

OK I’ve known this is a problem I have for a long time, and I haven’t done very much about it.

My first big loss wasn’t in the stock market, it was in managed funds.

I bought into three BT funds, most were in international shares. Within 2 weeks of entering they were down 20%! I’d waited 6 months because I thought there was going to be a downturn (1998 asian currency crisis), and I gave up waiting, I was rather upset!! after a while they turned around and then went on to be roughly 60% up, I was very happy, and the whole “time in the market” addage was reinforced, and I *Learnt* that if it went down it would go back up and I’d be better off… wrong!!!

BT lost a number of fund managers and changed ownership a few times, my funds got worse and worse returns, but I *Knew* it was only going to be a matter of time and they would go back up…. I held fast.

Eventually I realised that other funds in the same sectors (or other sectors) were doing MUCH MUCH better than my BT. The other thing was that any gains that the BT funds did make I paid capital gains tax on.. what tha!!! I was down!! in the end I sold them at a significant (for me) capital loss of 18K (paper loss was closer to 30K) and invested into other funds which I researched very carefully….
That was about 2 1/2 years ago and the new funds have more than recouped the capital loss I made.

You’d think I would have learned my lesson from that when I entered the share market wouldn’t you. Well apparently not ;)

What is it with making a $2000 trade that makes it so unthinkable to sell it at a loss of $200 if it goes wrong?? I don’t know but you would think that a loss of $200 is better than a loss of $1000, or worse wouldn’t you! apparently my brain doesn’t think like that at the time though!

I think it is partially ego, partially optomism, partially fear that the second you sell up the price will reverse and go on to new highs….. but looking at my portfolio, on average that hasn’t happened!

Why do our stupid emotions get in the way????

So a couple of weeks ago I sold half my holdings in MPH at a significant loss…

Today with a bit of encouragement I’ve sold RCL (which I very very nearly sold the day after I bought it when I realised I’d made a mistake, but once again the thought that I would lose $100 stopped me… It wasn’t looking so good when my 1000 shares purchased @ 1.89 hit 86c!!! when they did hit 86c I was thinking why the hell didn’t I sell at 1.79 and buy now!! but I held… I got rewarded when the takeover announcement came out, but that was just luck, I should have sold right at the begining when I had the chance.

I’ve also just sold 3000 IIN @ 90c. Average buy price was $1.42 so that’s a loss of around $1560… I have some consolation in the fact that I sold 1000 at $1.86 (had an order in for 2000 but only half went, just before it crashed), also they are up 5% today, and I kept the 1500 I bought at 70c just in case ;)

Have put an order in to sell the remainder of my MPH but it hasn’t been filled yet.

Still a few others there that need some (late) spring cleaning, but at least I’ve made a start :)

So what is the moral to this story??? If I’d used proper risk management, and not been afraid to lose a couple of hundred dollars here or there, then I’d be a few thousand dollars better off now (just on the losses) and probably much more, if I’d invested that money into things that actually were performing!!

I’ve made roughly -5% over the last 18 months in what has been one of the biggest bull markets in recent history, if I hadn’t been so stubborn, and pig headed, I’d be in a much better financial position now!

So don’t make the same mistakes I’ve made, learn to take the small pain that a small loss gives, to avoid the even bigger pain that will eventually occur if you don’t!!!!


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