By Slav Fedorov
In a word - SELL.
Chances are, in this market you are sitting on some steep and sudden losses. You don't understand what happened: good fundamentals, excellent story, great ratings... You feel you've done your homework and the market just disagrees with you. So you find yourself going back to the Yahoo message board for some cheerleading messages. You hope the market will recognize its mistake and turn your losses into gains. Well, it won't.
Hope is a poor investment guide. The only reason you buy a stock is to make money. If instead you are losing it, something obviously went wrong. It could be the general market, the particular industry group, or it can be company specific. It does not matter. Sometimes you never find out.
So why are others bullish? Who knows!
Yahoo posters may have bought years earlier and find it hard to let go of the years of enthusiasm. After all, the stock has been good to them. Has been. Or they hope to push the stock up by encouraging others to buy. Or at least not to sell. Analysts may have top ratings to keep the stock from sliding further so that their best clients can sell. To you.
The problem with holding a losing stock (well, in addition to LOSING money) is that it clouds your judgment. You may not be looking at other opportunities because you are determined to make this one right before doing anything else. In the meantime fresh zoomers are passing you buy.
You may be tempted to average down to lower your cost as you are watching in disbelief as the stock gets cheaper and cheaper. The problem with this approach is that the market can stay irrational much longer than you can stay solvent. You may run out of cash long before the stock bottoms out. The longer you wait, the more determined you become to sell to break even. If/when the stock does get back to where you can recover your cost, you jump out. The upward momentum may carry the stock much higher, but you are so disgusted with it that you are happy to get your money back as soon as you can so you can start looking for another "money making" opportunity. And that creates another problem: by not breaking out of this mode, you reinforce the losing strategy by repeating the same mistake over and over again, hoping that next time it will be different.
We all want Peter Lynch's tenbaggers. We all have seen 10-year charts rising steadily from the lower left hand to the upper right hand corner and said: if only I had bought here and just held...
Well, remember that Peter Lynch did not just buy and hold - he checked and re-checked the story and fundamentals. Plus, he dealt with OPM (other people's money). You are putting your hard earned cash on the line. Being deeper and deeper in the red every minute of the day clouds your judgment. Many sell when the pain becomes unbearable.
If you sell and take a loss, the pain will recede by the next day, when your broker's software gain/loss window resets to zero. It gives you a fresh start and the ability to look at things objectively. Is this still the best stock to buy? Would you buy it now? (And, in fact, if you do, the roundtrip may only cost $20.00 but give you a tax loss for the year.) What else is out there? Is this the right time to be in the market? And most importantly, if you have been through the cycle I just described, perhaps the best thing would be to analyze your past trading experience and see if it's time to learn new tricks?
Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC - a provider of proprietary trading data that swing traders can put to work right away.
http://www.tradingzoom.com/
Article Source: http://EzineArticles.com/?expert=Slav_Fedorov
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