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Common mistakes most investors make
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iPunter
Supreme |
29-Dec-2006 21:09
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hehe... Patseow8... You are so right that it's 'easy to say' but so very hard to do. .. :) Normally, if you are not yet a disciplined trader, any loss is much loss... it's not only a loss of good money... it is also considered a loss of face if one admits one have been wrong. Also, one would think it's only a 'paper loss' and think to oneself that the price will definitely bounce back soon. And so day by day, if the price drops a little bit a day. Being so reluctant to sell, the little bit will become bigger and one day you will have no choice but to become a long term investor. In reality, no one wants to be a long term investor. All want to make money fast. So it is important to sell it away if you have been wrong about the trend, even if you love the stock very much because, for example, you had done a lot of study on it's solid fundamentals.. |
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rickytan
Veteran |
29-Dec-2006 18:27
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hi giantlow, care to share how should one should cut loss for penny stocks ? |
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giantlow
Master |
29-Dec-2006 18:23
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this 10% doesn't realli apply to penny stocks |
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patseow8
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29-Dec-2006 17:23
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Great post, well said but not easy done however will try to apply on my new trades nxt time. thanks. |
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Nostradamus
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29-Dec-2006 17:07
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The "10% rule" in investment essentially tells you to consider selling a stock if it falls 10% below your purchase price. Doing this prevents you from suffering a devastating loss that will be difficult to recover from. The rule was created and described by famed investor Gerald M. Loeb in his book, The Battle for Investment Survival. In Section 22, called "Gaining profits by taking losses," Loeb describes how investors commonly hang onto their losers too long. "It is a great mistake to think that what goes down must come back up," he writes. By hanging on to losing stocks, investors miss out on better opportunities elsewhere. So, Loeb suggests as a rule of thumb that investors consider selling a stock if it falls 10% below the purchase price. He clearly says it's not a hard and fast rule, rather it's a guideline. "I'm inclined to say that when a new investment has shrunk by 10%, it is time to stop, look and listen. I think it usually ought to be sold out and the loss taken," he writes. The key point Loeb makes is that a good defense is often the best offense with investing. By avoiding a catastrophic loss, you can increase your overall performance. And yes, sometimes you'll sell a stock, only to watch it recover. But think of the 10% rule as insurance. The protection from disaster is worth the cost. Some investors, especially FA practisioners, hate this idea. They say they're long-term holders of stocks and think short-term swings are meaningless. Others say a 10% drop is too small and will create needless trading. I would agree with those investors if they own a diversified basket of stocks through UTs or ETFs. In that case, short-term swings are meaningless because you've eliminated a lot of risk by diversification. But if you're buying individual stocks, it's a different story. You need to protect yourself from a catastrophic loss. It's not hard to think of examples. My favourite is tech stocks. Most tech stocks fell 95% in price after the dot.com bust. They have yet to receover to the 50% level. Investors who bought the tech stocks during the dot.com boom kept hanging on when the prices fell 20%. "It will come back," they said. Then they suffer 50% drops. "I'm a long-term investor," they said and held on. Many held on as the stocks sank 90-95%, losing nearly their entire investment in the stocks. By then, they said that it was too late to sell and claimed that it was just paper losses. If they'd followed Loeb's advice, their loss would have been limited to 10%, not 95%! Owning individual stocks without some bail-out strategy is the stock market equivalent of owning a home with no fire insurance. |
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ten4one
Master |
06-Aug-2006 17:34
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Interesting post DanielXX! Similary, you could also buy more of a stock if the px goes up and doing 'extremely' well and forget about the 'original' target px. You've to follow your instincts and build up what you've got and ride with the tide. Once, you sense the reverse or px pullback, you could follow your strategy and start selling. Cheers!!!!! |
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DanielXX
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06-Aug-2006 10:29
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Some thoughts on target prices from: http://mystockthoughts.blogspot.com/2005/06/setting-target-prices.html One is often advised to have a target price in mind before buying a stock, and to have the "trading discipline" to sell the stock once it reaches that target price. This approach does impose a certain trading system on the rookie investor, but certain aspects of this advice do run contrary to other conventional wisdoms which then confuses him. Firstly, setting a target price is good for deciding whether the stock offers potential high returns for the investor. Say, if the investor assesses that there is 50% upside ie. the target price is judged to be 50% higher than the current price, then clearly there is high return. However, if the decision is taken in isolation through consideration of the target price alone, clearly the other important factor is forgotten: the probability of the stock being able to appreciate to that "target price" (this could depend on many factors: institutional ownership, macroeconomic trends, earnings risks etc). Secondly, how does he set the target price? If he decides he will set it at say, 20% above the current price, a conservative trading technique, it doesn't make sense because this is too arbitrary and clearly the market doesn't care what price this particular investor bought at. A more logical method is to set the target price at a certain target PE representative of the sector the stock is in. However PEs are never static; a stock can be trading at 10 times PE during a declining economy and be considered expensive or it can be trading at 15 times in a recovering economy and be called cheap. Thirdly, does one sell the moment the original target price is reached? It is good "discipline" to do so but surely practising this is a form of "stop profit" technique?? (adapting the "stop loss" terminology). One of the most well-known adages is to let one's profits run, and indeed this should be practised. The idea is to remain abreast of business developments affecting the stock in question and to have a dynamic, rather than static, evaluation of its "target price". The role of psychology and momentum in the stock market should not be discounted; often prices go higher than expected as people get excited about a certain sector or stock. A pragmatic view of "target price" should be evolving in real-time with price developments (as opposed to business developments which gave rise to the original price target) and take into account such human factors. Perhaps one good way to exercise profit-taking discipline after the breaching of the original price target would be not to sell immediately, but rather to sell on the first significant show of price pullback, say 5-10% retracement. This is a combination of stop-loss and profit-taking, with the final transactions being exercised at prices above the original "target price". |
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ten4one
Master |
06-Aug-2006 08:08
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Target Pxs are just only one of the guidelines for investors. Of course, each and every investors set their own guidelines according to their own 'guesstimates' of the Market's environment prevailing at that time. Most of the times investors have to decide whether to buy or sell to correspond with the trading environments or else they'll be caught as 'also run' and wait for the next 'event'! All said, I think there're many ways to skin a cat! Cheers!!!! |
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Nostradamus
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05-Aug-2006 19:28
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Price targets are seldom reached, unless the company does very well and its target price gets upgraded. Assuming retail investor (RI) A reads a report which says that the target price is $2. She decides to sell using a safety margin of 5% ie $1.90. RI B, in order to sell, uses a safety margin of 10%. Yet another RI C uses a safety margin of 15%. An institutional investor ramps the price up to 80% of the price target and sells the shares. I sold the shares with a safety margin of 25%. So only the institutional investor and me benefit, while the rest didn't manage to sell and are left holding the baby. This is human psychology. Everyone knows the price targets. Each one will lower his selling price in order to sell. So the price target never gets reached. The same works when buying. Let say the support is $1, buying occurs a few bids before that and the support never got reached. |
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Livermore
Master |
05-Aug-2006 16:55
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Hi Ten4one, My analogy means when I wish to buy something, I don't throw in all my lots at one go. I buy a bit and monitor the direction, one a uptrend is confirmed, I buy more. If I buy all my lots at one go and the share price goes down, I don't have any more "bullets" to cover my "positions". It is a simple strategy adopted by George Soros too. |
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Matthew8
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05-Aug-2006 16:21
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TA = Techincal Analysis FA = Financial Analysis GA = Gambling Analysis |
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singaporegal
Supreme |
05-Aug-2006 15:29
Yells: "Female TA nut" |
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dun get you... whats' GA?? :) |
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ten4one
Master |
05-Aug-2006 11:24
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Yup! Patience............and wait for the right moment to unload is the mother of all strategies! Cheers!!!!!! |
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Matthew8
Member |
05-Aug-2006 11:24
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lewsh88 - I concur with you that firing a salvo at the most appropriate moment is a good strategy - especially for traders who have the time to keep a close watch on what the 'invisible hand' is going to do behind a counter. This is what some people called GA - not TA or FA. When the invisible hand starts to work at a counter, all TA or FA will be thrown out of the window. Traders with GA will know how to follow the Banker and win. This is my personal opinion. |
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lewsh88
Senior |
05-Aug-2006 11:04
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A third strategy is to keep all the bullets ready and fire a salvo at the most appropriate moment, such as the famous October crash, mid-east war, 911, etc... Then you can make a big bundle enough to last through 7-years of famine. I believe every year, without fail, there would be a few days when the market suddenly drops a lot. During such moments, most of us are two feet stuck inside and watching helplessly with saliva drolling mouths. Just like what singaporegal mentioned sometime back, she was out of the market during the May/June meltdown. As a trader(not investor), it is always good to be liquid. Getting in in the morning and getting out before five during trading days would be ideal. |
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ten4one
Master |
05-Aug-2006 08:36
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I've to disagree with Livermore. In a war or the Stock Market, make sure your 1st shot kills or be killed by your enemy's fire. There is no 2nd chance 'cos b4 you could fire more shots, you're already dead! Cheers!!!!!! |
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Livermore
Master |
03-Aug-2006 23:07
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Just like in war, don't fire all your bullets. Fire some bullets to test the enermy. Once you know where is the enermy, fire more bullets to kill the enermy. You can use this analogy for stock trading |
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ten4one
Master |
03-Aug-2006 20:45
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Can't agree with you more, jessie. Another words there isn't a single strategy that works in an environment that is always dynamic and keep on changing all the times. All good Traders know that! Hence, you'd expect to win some battles and lose some battles - you can't win all the times! You may lose 6 battles and win four. It is sweet to know that at the final bell you still win the war. The best strategy is the one that win the war! Cheers!!!!!!!! |
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teeth53
Supreme |
03-Aug-2006 20:32
Yells: "don't learn through life, learn to grow with life " |
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In short stocks, oni it dependable is one self (home work more home work) and if that oso can not depend on, then what ?? learn d hard way !, not to depend on at all time, but did say all the time . So the real meaning isit some times oso can lah... that rite. |
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jessie
Senior |
03-Aug-2006 17:55
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I have attended seminars and talks conducted by Charlie Lau Suan Liat. This is one of his quote " In a stock market, no single person, no single fundamental, no single theory, is 100% dependable all the time." |
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