Investing Tips: Hope, Fear And Reality.

Here is a great passage taken from the book "How To Make Money In Stocks" by William O'Neil.

• Everybody loves to buy stocks; no one loves to sell them. As long as you hold a stock, you still have hope it might come back up enough to at least get you out even. Once you sell, you abandon all hope and accept the cold reality of temporary defeat.
  
  Investors are always hoping rather being realistic. The fact that you want a stock to go up so that you can at least get out even has nothing to do with the brutal reality of the market. The market only obeys the law of supply and demand.
  
  A great trader once noted that there are only two emotions in the market: hope and fear. "The only problem," he added, "is we hope when we should fear and we fear when we should hope." (pg. 93)

When Does a Loss Become a Loss?

9-88. Chapter 9, Page 88. How To Make Money In Stocks

When Does a Loss Become a Loss?

When you say, "I can't sell my stock because I don't want to take a loss," you assume that what you want has some bearing on the situation. But the stock doesn't know who you are, and it couldn't care less what you hope or want.

Besides, selling doesn't give you the loss; you already have the loss.

If you think a loss isn't incurred until you sell the stock, you're kidding yourself.

The larger the paper loss, the more real it will become.

For eg, if you had paid $40 per share for 100 shares of Buggers United, and it's now worth $28 per share, you have $2800 of that lousy good for nothing Buggers United that cost you $4000. You have a $1200 loss. Whether you convert the stock into cash or hold it, it's still worth only $2800.

Even though you didn't sell, you took your looss as the stock dropped in price. You'd be better off selling and going back to a cash position where you can think far more objectively.

When you're holding on to a big loss, you are rarely able to think straight; you rationalize and say, "It can't go any lower."

However, keep in mind that there are many other stocks to choose from where your chance of recouping your loss could be greater.

Here's another suggestion that may help you decide whether to sell:

Pretend you don't own the stock and you have $2800 in the bank.

Then ask yourself, "Do I really want to buy this Buggers United stock now?"

If your answer is no... then why are you holding on to the stock?


How true isn't it?

A loss is a loss is a loss.

In the share market, folks who hang on to their losses is an a self-denial state. They are simply wishing and hoping and praying that a market bull will occur and help them recover their losses.

Is this really rational thinking?

I know personally folks who are holding on the stocks that they bought at rm10.00 but trades at a miserable 1.00 or so. "Why aren't you selling?", I asked. "It's alright since its paid for, so I will wait for the next bull run!" was the answer I got. Well, it's probably about a good 10 years ago!

Rational thinking or plain silly thinking.

Now I wonder, if a dire emergency really happened, would she be willing to finally accept the loss and cash out on her mistake?

C-A-N we Slim?: 19

More on William O'Neil's book, How To Make Money In Stocks

Enjoy!

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Nineteen Common Mistakes Most Investors make

1. Stubbornly holding onto losses when they are very small and reasonable.

2. Buying on the way down in price, this ensuring miserable results.

3. Averaging down in price ratther than up when buying.

(following up your losers and putting good money after bad)

4. Buying large amount of low-priced stocks rather than smaller amounts of higher priced stocks.

(think in terms of dollars and not the number of shares u can buy. Buy the best merchandise available and not the cheapest. Stocks are cheap for a reason. They've either been deficient in the past or have something wrong with them now. Stocks are like anything else. The best quality never comes at the cheapest price.)

5. Wanting to make a quick and easy buck.

6. Buying on tips, rumours, split announcements, and other news events, stories, advisory-service recommendations, or opinions you hear from supposed market experts on TV.

7. Selecting second-rate stocks because of dividends or low price-earnings (P/E) ratios.

8. Never getting out of the starting gate properly due to poor selection criteria and not knowing exactly what to look for in a successful company.

9. Buying old names you're familiar with.

(familiar names does not equate to a good stock to buy)

10. Not being able to recognize (and follow) good information and advice.

11. Not using charts and being afraid to buy stocks that are going into new high ground in price.

12. Cashing in small, easy-to-take profits while holding the losers.

13. Worrying too much about taxes and commissions.

14. Concentrating your time on what to buy and once the buy decision is made, not understanding when or under what conditions the stock must be sold.

15. Failing to understand the importance of buying quality companies with good institutional sponsorship and the importance of learning how to use charts to significantly improve selection and timing.

16. Speculating too heavily in options or futures because they're thought to be a way to get rich quick.

17. Rarely transacting "at the market" and preferring to put price limits on their buy and sell orders.

(by doing so, they're quibbling for the eights and quarters of a point, rather than focusing on the stock's larger and more important movement. With limit orders, you run the risk of missing completely and not getting out of the stocks that should be sold to avoid substantial losses... all because of the eights and quarters of a point)

18. Not being able to make up your mind when a decision needs to be made.

19. Not looking at stocks objectively.

C-A-N we Slim?: Accepting Mistakes!

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?


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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.