Wednesday, May 28, 2008

Blast From The Past: Accepting Mistakes!

Got plenty of interesting comments on the posting, Is Paper Loss Not A Loss?

I thought i dig up an old posting of mine.

Enjoy!

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Anyone like William O'Neil's book, How To Make Money In Stocks ?

I am sure you will be puzzled how come an 'investor' like me would want to read such a book.

Well, a book is a book is a book. And there are some interesting stuff an investor can pick-up and learn from the book. (die lah... do i sound like a book salesman oredia???.. :P)

Anyway... here is a snippet from Chapter 9.

Bernard Baruch's Secret Market Method of making Millions

If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person if he has the sense to cut his losses quickly on the ventures he has being wrong.


As you can see, even the most successful investors make mistakes. These poor decisions will lead to losses, some of which can become quite awful if you're not disciplined and careful. No matter how smart you are, how high your IQ, or education, how good your information, or how sound your analysis, you're simply just not going to be right all the time....

You positively must understand and accept the rule number one for the highly successful individual investor is.... always cut short and limit every loss.

To do this takes discipline and courage.

The whole secret to winning big in the stock market is not to be right all time but lose the least amount possible when you're wrong. You've got to recognize when you may be wrong and sell without hesitation to cut short every one of your losses.

How can you tell when you may be wrong? That's easy. The price of the stock will drop below the price you paid for it! each point your favourite brainchild falls below your cost increases both the chance you're wrong as well as the price your're gonna pay for being wrong.


Ahhh.... I like the second and third paragph (highlighted in red) ..

Some investors can NOT accept the fact that perhaps they could have made a poor investment decision in the first place.

And when the investment turns bad and the financial datas giving us the clear and distinct signs that we are ABSOLUTELY WRONG in our reasoning...

What is the right thing for one to do?

Dont' we want to stop from being wrong?

Or do we want to continue to be wrong and hope that the market will one day correct us from being wrong? (Isn't this simply playing the loser game?)

So what is the right thing to do?

Acknowledge and recognize our mistake by ze CUT-LOSS.

Accept the fact that perhaps it wasn't investing or the buy & hold thingy that went wrong BUT it was our poor initial judgement that was wrong!

Our stock selection was simply flawed.

And we achieve this by SELLING the stock immediately!!

Do not wait for the market to help us correct our mistake.

When we are wrong, we have to accept this fact.

Acknowledge it and deal with it.

Do not turn the buy & hold into a buy & hope.

On the other hand, this other part...

how can you tell when you may be wrong? That's easy. The price of the stock will drop below the price you paid for it! each point your favourite brainchild falls below your cost increases both the chance you're wrong as well as the price your're gonna pay for being wrong.

Ahhh.... i do reckon that this is the most complex part of investing.

Sometimes the stock market simply does not agree with our investment decision!!

What do we do?

Are we right or is the market right?

This is where winners and losers are made in investing. Those who are precisely sure that their reasoning is correct, should not be afraid that the market does not agree with them. Instead, they should view this as an opportunity. An opportunity to invest more of the good quality stuff at the cheaper price. Same quality item but only cheaper.

But... butt.... buttt......

Where and what and how could such investor go wrong?

Well... determining whether if they are right or if they are wrong!

If right then the investor will surely reap their success!

But... if they are wrong.... such strategy is extremely dangerous for what they have only DOUBLED DOWN on their mistake.

Does this make commonsense? or issit simply silly billy to do such stuff?

Again...... i have to mention again..... this is Ze hardest part of investing.... cos when stock prices go down... sometimes.... investors start thinking with their heart and not their brains.... and when they fail to recognise their fault in their stock selection process, they are only DIGGING a deeper hole for themselves.

Tiok boh?


*
ps...
my buddy Liam or some call him LMF... recommended Chapter 8 wor... err... me too!... good stuff lah! ... but... i dun think it is too nice if i reproduce wholesale of what's written in that book.

6 comments:

Remnant 888 said...

It make you feel like a dumb dumb fella when you make a paper loss and worse a real idiot when you actually realise the loss in physical sense. Yet so true, investor should learn to accept mistake and MUST learn to cut losses.

My cut:
BDI was all the days up till last 2 days. Yes, we all thought the China quake will drive the BDI. Yes we all thought the demand on commodities and the lack of ship would drive BDI up. What we din thought of was how escalating cost of crude would affect the performance of earnings. What truly happens.? BDI up becos of demand or becos of cost of ship fuel.?

Did I misread the trend.? Maybulk, Hubline stock prices were down even bf BDI was down. Hubline prices suffers badly; I was burnt with 11% physical loss.

I was left with 89% cash. Enough to keep the fun in investing intact. Enough to be thankful that it's not 50% (it would be hard to cut losses)..

Moolah said...

Ron,

It takes a big man to admit to their mistakes and no, one should never feel ashamed of realising their losses!

rgds

Remnant 888 said...

moola
Thanks again for your timely article and reminder.
I know it has helped me and will continue to help others in situation like mine in this weak market.
Keep up the good work and thinking system.

RR said...

Quote "how can you tell when you may be wrong? That's easy. The price of the stock will drop below the price you paid for it! each point your favourite brainchild falls below your cost increases both the chance you're wrong as well as the price your're gonna pay for being wrong."

-> In my opinion, its NOT EASY to know you are wrong or not. e.g You bought a stock at RM1.00 on Monday, and on Friday it closed at RM0.98.

Are you wrong? Very hard to say. So to me, it is NOT EASY to know whether are you wrong or not.

Quote "Ahhh.... i do reckon that this is the most complex part of investing."

-> Agree. thats why it is NOT EASY to know whether you went wrong or not.

Quote "Sometimes the stock market simply does not agree with our investment decision!!
What do we do?
Are we right or is the market right?"

->I think 1st, we should review back the facts you have, the reason you have in buying the stock of that company.
2nd, assess the market sentiment. What is the factor that is affecting the market sentiment.

Then, you will get a ROUGH idea on whether are you right or the market is right.

Quote "If right then the investor will surely reap their success!

But... if they are wrong.... such strategy is extremely dangerous for what they have only DOUBLED DOWN on their mistake."

-> Yes. If you are wrong, you may lose ALL your investment on that particular share (bankrupt). If you are right, you may get 10% of reward? 100% reward? or 1000% reward (ten-bagger)?

I think, asset allocation is important in this. The question is how much are you willing to lose to the market when EVERYTHING just turn sour?

To me, I take investing in blue chip like trading in Warrant near their expiry date. When you "Click" Buy, you better make sure you are ready for a total loss. (who knows those big guys don't cheat on you)

Most of the people use this phase "To replace a 50% loss, you need a 100% gain"
to explain why cut loss is important in protecting your portfolio.
Hence, they cut loss at a certain x% below their initial investment.

(x% is your risk tolerance)

But, majority of us don't see the other side of this phase
"To replace a 50% loss, you need a 100% gain."
Whoever who said this make one of his point strong.
The market is not for you to play play. Get serious with Mr. Market. Take each "buy" or "sell" decision as a dead & live decision.

It is just useless to keep on cutting losses, when you don't even bother what you are doing in the market.

So, get SERIOUS.

Quote "Again...... i have to mention again..... this is Ze hardest part of investing.... cos when stock prices go down... sometimes.... investors start thinking with their heart and not their brains.... and when they fail to recognise their fault in their stock selection process, they are only DIGGING a deeper hole for themselves."

->YES. I agree that this is the hardest part. I am still learning to understand it. Thats why life is a life-long learning process... Cheerz :)

-RR-

Moolah said...

Waaa..

You guys are PRO investors lah...

Perhaps I need to learn more from you folks instead!

Cheers!

RR said...

Dear Moola,

We are all sharing our knowledge, our view here.

I personally really appreciate all your posting and all your comments.

I have really learnt a lot from you throughout the years. (ya, I have been reading your blog for more than a year)

I love it when you post up a certain company, and analyzed it from all aspect and tell us your comment on it. It is just awesome!

Thanks for sharing :)

Cheerz

-RR-