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 now 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?
wthats not everything, it also depends on how many person wants to pay that price to buy the stock from you. if you are holding 1000 lot but only 20lot buying at $10, the rest buying at $8... then what you got is not 1000 X $10 but 20 X $10 + 9980 X $8...
ReplyDeleteso it really depends on the volume as well...
Dearest Dennis,
ReplyDeleteI had posted a straight forward example, in which the cost of investment was 10.00.
Quote: 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.
This was the said scenerio.
Of course, if you want to change this scenerio, it's fine.
And yes, depending on one's buying techiques (such as suggested by you) could have gotten that said share at a cheaper cost. Say at 8.00.
However, the cost of this share currently is at 1.00.
Which means a paper loss of 7.00 per share based on a cost of 8.00.
So is this paper loss not a loss?
rgds
Dear Moola,
ReplyDeleteFrom what you had written,
I believe you are convinced that A paper loss is a paper loss.
What about a paper gain?
Is a paper gain a gain or not a gain?
Looking foward to your reply :)
Dear RR,
ReplyDeleteFor me, a paper gain is a gain where the trader/investor can realise their gains the very instant they cash out of their position.
Sorry, what's your point exactly?
I know... what you want to say is the old saying "If you don't sell, you don't lose" right?
Of course, in the share market, anything can and will happen.
So what will happen if one don't sell?
Some possible scenarios for me.
1. Wait till the share recover. (The person recovers their losses)
But is it that simple?
Remember the simple law of Maths. A stock that drops from 1.00 to 50 sen, indicates a loss of 50%. However, to regain that 50 sen, the stock needs to surge 100%. (And it's even worse when you consider a stock dropping from 10.00 to 1.00!)
2. The stock could recover but it takes say 5 years.
Scenario: What if an emergency happens? (Life is never fair, yes? ) What if one needs this money and the stock is still sitting on a massive paper loss?
3. The stock never recovers.
rgds
Assuming, you bought at RM10, right now the market is trading at RM8
ReplyDelete"Is Paper Loss Not A Loss"
If you answer is YES, then you would have propably been applying the trailing stop/stop loss strategy on your trading/investing. You will stop at RM8, stand side line, and look at the whole situation again. Averaging down is just not your cup of tea.
"Is Paper Loss Not A Loss"
If you answer is NO, then you would have propably been applying the Buy & Hold strategy. You will not stop at RM8, instead, you will average down your cost, or maybe do nothing.
I think the question "Is Paper Loss Not A Loss" is a YES & NO answer.
After buying the stock at RM10, and it drops to RM8. It takes courage to STOP LOSS, and it also takes courage to AVERAGE DOWN.
For me, to AVERAGE DOWN or to STOP LOSS really depend on the business/company you are buying. Some you should stop loss, some you should average down.
My 2 cents :) Looking foward to your reply.
Dear RR,
ReplyDeleteInvesting or trading in the stock market had always been preferred because it's rather liquid.
Investors have the option to redeem their 'investment' whenever they chose to do so, instantly.
That's why one of the main reason of buying shares.
It's not like a time deposit where there is a time frame issue imposed on the investment.
Hence, in my opinion, it's best that the investor not delude themselves otherwise.
What's on paper represent what's the investment is worth NOW. Present day, present time. Not a dollar more and not a dollar less.
It could worth more in the future but it could also worth much less.
Why should 'a buy and hold' investor believes that it's a certainty that in the future that their shares should be worth more?
Is it ever guaranteed?
Is life ever fair?
So how do you want to treat one's paper loss?
Buying more or averaging down?
Well, what if one had made a mistake in the stock selection?
Not possible?
And if one is wrong, then by commonsense reasoning by averaging down, it would simply means one is buying more of the stock selection MISTAKEs, hence one is only compounding one's MISTAKEs.
Which is why, if you ask me, I do not believe much in avarage down.
It gives the person an alternative route than acknowledging their mistake. It makes people delusional.
And I do indeed see this happening a lot! Folks blatantly abuse this average down strategy by buying more despite knowing very well that they had made the mistake from day one. Yup, they cannot accept the very fact that they were wrong. They just turn their paper losses into long term 'buy and hold'.
And more often than not, I see many terrible results from such strategy.
Just my one sen.
Dear Moola,
ReplyDeleteThanks for your post once again.
Refer to your previous post:
1) Why should 'a buy and hold' investor believes that it's a certainty that in the future that their shares should be worth more?
->The investor believes that the future of their shares should be worth more, only when they believe that the company that they are investing will make greater returns over time.
2) Is it ever guaranteed?
->There is no guarantee in investing. There is always risk involving.If there is a 100% guaranteed return in stock, please let me know (but i will be sceptical)
3) Is life ever fair?
->Life is not fair. Therefore, we learn to appreciate life, just look at those people in SiChuan or Myanmmar.. count your blessing.
4) So how do you want to treat one's paper loss?
->As I said, a paper loss, it may be a paper gain, or it may be a larger paper loss.
It takes courage to believe in what you are doing. Therefore, I still believe the answer for "A paper loss Not a loss" is a YES and NO.
Depending from which perspective you are looking from.
5) Buying more or averaging down?
-> Buying more or averaging down when you have a paper loss? It really depends on the company/business that you are investing. Besides, how much you believe in your judgement,
and do you know what exactly you are doing in the market?
6) Well, what if one had made a mistake in the stock selection?
-> If you are averaging down on a paper loss, in the end this company end up bankrupt. I would say that, you will lose all you have in this investment.
-> Hence, I believe, ASSET ALLOCATION is the key to limit your downside risk. Do you agree with me?
7) Not possible?
-> ya. It is possible to make a mistake in your stock selection. Take for example, Transmile.. you bought it base on their earnings, management, balance sheet, cash flow.
But, in the end, it is just a bitter ending.
YOu pointed out that one does not acknowledge their MISTAKE, and take "averaging down" as a route to avoid from admitting their MISTAKE.
In this way, they COMPOUND their MISTAKE.
For this, I have to agree with you.
But, I DO NOT believe that when the price of a stock drop -20% of your purchasing price, it is a MISTAKE.
The biggest MISTAKE in stock market that you can ever do is that, you DO NOT KNOW what you are doing in the stock market.
So, for me, the answer for "Is Paper Loss Not A Loss" is YES or NO.
Based on how much you know what you are doing.
my 2 cents :)
RR,
ReplyDeleteYou said:
"So, for me, the answer for "Is Paper Loss Not A Loss" is YES or NO. Based on how much you know what you are doing."
I would suggest that more appropriately, it should be:
"Based on how much you know what management is doing."
This is strictly of greater importance in the context of Bursa Malaysia. Management, in Bursa Malaysia, is more often than not also a major shareholder. And major shareholders in Bursa Malaysia is more often than not out to screw minority shareholders. :P
So...an investor may think that he/she knows what he/she is doing, in the end, that may not be important. More important is to know what management/major shareholder is doing. And that is often elusive.
John,
ReplyDeleteI have to agree with your point there:)
Management is a key area where tiny investor like me have hard time to properly evaluate them.
What I can do, will be doing research based on their track records of management.
Hence, Stop Loss is important when you take into account the Uncertainty of management (big shareholder) screwing those tiny shareholder (like me).
However, For those company, with strong cashflow, solid balance sheet, good earnings, good management reputation, like Ppbank. I will invest in them based on those data. This company, I will go for "buy and hold" "paper loss averaging down".
BUT! I still don't believe ppl like Tan Sri Teh of PPBank that much, after all, he is not my dad. If I see the price of the stock goes down, I will average down by stages to a maximum of 10 to 15% of my total Portfolio. (just an example, i don't own Ppbank)
Once again, for me, the answer for "Is Paper Loss Not A Loss" is YES or NO.
Based on how much you know what you are doing, e.g how you evaluate a business, how you manage your asset allocation, how you treat the fluctuation of the market and etc..
Tiny fish like me.. still hv lots to learn.
Looking forward to any reply:)
Dear RR,
ReplyDeleteDear Moola,
1) Why should 'a buy and hold' investor believes that it's a certainty that in the future that their shares should be worth more?
->The investor believes that the future of their shares should be worth more, only when they believe that the company that they are investing will make greater returns over time.
Comments: RR, Everyone buys shares thinks the same, yes?
A trader believes that in the future their trading positions would equate to a profit when compared to their entry.
So does the investor.
4) So how do you want to treat one's paper loss?
->As I said, a paper loss, it may be a paper gain, or it may be a larger paper loss.
It takes courage to believe in what you are doing. Therefore, I still believe the answer for "A paper loss Not a loss" is a YES and NO.
Depending from which perspective you are looking from.
Comments: RR, whichever way you want to look at it, when one SELLS their shares, they are realising the PAPER value of their shares at that moment of time.
Think about it.
What's on paper represent what's the investment is worth NOW. Present day, present time. Not a dollar more and not a dollar less.
The very second we sell the share we are realising our paper value of our investment/trading position.
So.. is what's on paper real or not?
Of course you can say one can sell later.
Ok.. but when you sell later, you are still going to realise the paper value of your shares at the later date of time.
Any difference?
Is what's on paper real or not?
Why is this soooooooooo important?
Look around. For me, the greatest mistake I see on the market is the abusing of the buy and hold/paper loss issue.
One buys a share, a mistake was made. They then turn it into a buy and get OLD strategy. Why? Because they delude themselves by saying as long as they don't sell, the paper loss is NOT real.
And more often than not.. these paper losses WILL be redeem sooner and not later.
6) Well, what if one had made a mistake in the stock selection?
-> If you are averaging down on a paper loss, in the end this company end up bankrupt. I would say that, you will lose all you have in this investment.
-> Hence, I believe, ASSET ALLOCATION is the key to limit your downside risk. Do you agree with me?
Comments: Asset Allocation and Money Management are indeed very important. But it will never cover the mistakes of one not owning up to their mistakes.
rgds
Dear Moola,
ReplyDeleteah, I see your point there. Good point.
"What's on paper represent what's the investment is worth NOW. Present day, present time. Not a dollar more and not a dollar less. "
My thinking process:
1) Time: Now Realiasing
2) Outcome: Clear Cut situation, a paper loss is a loss. A paper gain is a gain.
3) "Is paper loss Not a loss" ?? YES, it is definitely a loss for NOW.
--------------------------------
Quote "Ok.. but when you sell later, you are still going to realise the paper value of your shares at the later date of time."
Any difference?
My thinking process:
1) Time : Realising Later, no specific date.. may be a year later.
2) Outcome : 5 scenarios:
->A paper loss NOW may not be a paper loss LATER.
->A paper loss NOW may be a greater paper loss LATER.
->A paper gain NOW may not be a paper gain LATER.
->A paper gain NOW may be a greater paper gain LATER.
->NO changes
3) "Is paper loss not a loss" ??
With longer time frame, nothing is impossible. My answer will be YES and NO.
YES because you want to realise it NOW. A paper loss is a loss.
NO. If you are not realising it NOW. Life is not fair and full of uncertainty. The outcome MAY BE different (the 5 scenarios)
4) Any difference?
YES. There is a difference from realising it NOW, and realising it LATER.
Standing at NOW, realising at NOW. A paper loss is a loss.
Standing at NOW, realising at LATER. My answer will be YES/NO.
-RR-
Dear RR,
ReplyDeleteIn the future, no one knows, yes?
:)
Hence, for me, it's best we not kid ourselves. The paper value of our investment equates to what our shares is worth at this moment of time.
Dear Moola,
ReplyDeleteIn the future, no one knows, yes?
:)
Hence, for me, it's best we not kid ourselves. The paper value of our investment equates to what our shares is worth at this moment of time.
Totally agree:)
Thanks for the sharing.
Especially this phase from you
"What's on paper represent what's the investment is worth NOW. Present day, present time. Not a dollar more and not a dollar less. "
It is really a very good point. It is so simple, yet to me it is so hard to comprehend at first.. which leaves me pondering a lot :)
Thanks.