What should I do with my counter with 70% paper lost?!

No body likes to be holding on to losing stocks. Those are hard earn money, but unfortunately it is part and parcel of stock investment. Even the best investor will get surprised once in a while. The more important question is what are you going to do about it. Will you shun the stock market because you have suffered or are you going to take it as an opportunity to learn and do better next time? Your answer to that question will lead you to very different actions on your losing stocks.

if you feel that stock investment is too volatile and is too risky for you, I would suggest sticking to index investment or other asset class investment with lower volatility. Stock investment is definitely not the only way to increase ones wealth.

If you want to like to continue with stock investment, I would suggest you start by asking why you suffered 70% lost in the first place. From understanding the why you got to where you are, you will be able to find your answer of where you should go. Here are some of the common pitfalls of holding on to big paper lost.

a) Lack of appreciation of the overall market sentiments

-If you break it down to the basics, you will realized that the market only moves in 3 phases. it either moves Up, stays flat or moves down. By simply learning to identify which phase the market is moving will increase your stock pick success probability by 20% or more. Trace back to history and you will see that during a bull or down turn, almost all stocks will move in the same direction. Regardless if it is a blue chip or penny stocks. So you think the market is heading to correction, you should hold off buying. But if the signs are still favorable, why not ride the wave?

b) Lack the understanding of the counter’s business environment and model

-When you buy a stock of a company, you are actually becoming a shareholder. Meaning you will only invest if you think the company is in a good position to grow and generate more wealth for you right? So, it is very important to really study the company that you want to invest in. No difference from buying a book or a property. The good news is that all listed company have their track record for you to evaluate. To get a quick overview, look at revenue growth, earnings growth and how they handle debt, you will get a very good picture on the health of the company. The golden rule here is never invest in something you don’t understand.

c) Lack of a cut lost strategy

-This by far is the most important when it comes to wealth preservation. Always know how much you are willing loose before you buy any stock. When the counter turns against you, you need to cut your lost immediately so you can fight another day.
We can do all the studies on market sentiments and analyse the company fundamental till death, but there is always a chance we can be wrong. So if that happens, the investor need to know about it and act to prevent huge lost.

That was the long winded answer to the questions. The really short answer is you think the current counter cannot offer better value and has potential to go lower. one should sell. But before you invest in another stock, do consider the above 3 pitfalls before jumping in again.

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first appeared at http://myfcoach.com/faq-what-should-i-do-with-my-counter-with-70-paper-lost/#comment-3