Small Business Ideas & Small Business Marketing: How Do You React When Your Stocks Are Losing Your Money

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January 5, 2007

How Do You React When Your Stocks Are Losing Your Money

There is a lot of money to be made when trading stocks, however, losses are a fact of life for every stock market investor. The difference between successful traders and the rest is simply in how they deal with those losses. Its that strategy that will either make you money, or simply add to your losses.

The buy and hold method of trading large and small caps has been preached to and from the choir loft. Yet it is one thing to hear and know that this is a solid investment tactic and another thing in which to follow through when your stock has dropped 20 points during the course of a single afternoon.

Anyone has suffered through the woes of a bear market knows that it is quite difficult to stick to your initial investment strategy when all around you people are jumping ship and liquidating assets. This is an investment strategy that requires discipline along with nerves of steel. Fears of depression often have investors heading for the hills and using logic that is at best faulty and at worst financially devastating.

If you have done your due diligence on your investment before you bought, then you should be able to weather the storm over the long term. As a matter of fact, the drop may provide the perfect opportunity to add to your position. Its important to remember that the buy and hold strategy works best with large cap stocks.

During bear markets, its perfectly normal for normally stable stocks to start to sell off. There are plenty of legitimate reasons, including, those who need to liquidate their positions (to buy a house, pay off some bills, go on vacation etc), to those who are looking to take some profits off the table. If your investment is up 50%, you too may be tempted to take some money off the table and invest it in something else. Since we don't know the motivation of the sellers, its something that we shouldn't spend too much time trying to figure out. Unless there has been news out that changes the direction of the company, its a safe presumption that the share price should continue to move higher.

We've put together 3 fundamental truths that should help you to weather the storm.

Its More Than Just A Sheet Of Paper
What you hold in your portfolio is a part of a company. Unlike day traders who buy and sell over the short term, hoping to make money by playing the up and down movement of the share price, long term investors are looking to own a piece of a company; to share in the story of the company. What your shares represent is a piece of everything the company owns. From pens to buildings, you own a portion of it.

Owning a portion of a company is no different than owning anything else. From a car to a home, whether you own it outright, or own it with someone else, in both cases, you need to do your due diligence. The price of everything fluctuates, whether its the value of a home, or a collectible hockey card, its value will move according to how the market is valuing the item. Stocks are no different. If you have researched, asked questions, and followed the movements of the share price, each of these actions has one thing in common: the do not involve emotion. If you let emotion dictate or influence your investing decisions in any way, you need to stay away from the stock market - you are going to lose money.

When a stocks share price moves lower, its for one of two reasons. Either the company has issued a material news release, which changes the variables you used to base your decision to buy on, or, for some reason that is not apparent at the moment. This is where you need to assess your position with a clear mind. Is this a signal of the future direction of the company, or, a great opportunity to add more shares to your portfolio at a great discount. You wont be able to make that assessment if you let emotions cloud your thoughts.

Focus On The Big Picture
Are you trading large and small caps with the big picture in mind? If you look at any chart over the long term, you can easily identify areas where a company has dipped, only to trade much higher a few months later. In most businesses, there are seasonal changes that affect the share price. If you are trading stocks with the big picture in mind, then you can easily identify this as an opportunity to add to your portfolio. When the company releases news, how will it impact the company? Plenty of companies have for example, sought financing by issuing shares. Typically, this involves providing the buyer with the shares at a discount to the current market price. Not surprisingly, the share price drops to that amount. This is usually where the traders bail (hitting their stop losses on the way down). However, if the company is a solid one, that is going to use the money for expansion, acquisition or debt repayment, the market will reward investors over the long haul. If you sold based on one days trading actions, you would be out of a position, just when the company is poised to move higher.

Whether your are trading large and small caps for the short term or long term, the following tips should help to improve your returns:

Consider buying after a major correction. Markets go up and markets go down. Over time, they always go in an upward direction. Often corrections will provide excellent buying opportunities because of the "herd mentality". This often creates an oversold situation, which is perfect for buying! Just ensure that you are buying a strong company.

Remember: trading large and small caps is not an exact science. It is better to be approximately right than definitely wrong. You don't need to sell at the peak to be a successful investor. I would rather have sold a stock at 20% off it's 52 week high than 20% higher than it's 52 week low!

An educated investor will take on greater risk if the anticipated reward is sufficient. If the research shows that a company is going to do very well, taking extra risks at the right time can increase your returns. Using margin can add risk to your portfolio, thus potentially increasing your return. Ensure you have a Plan B incase your research turns out to be incorrect.

Having a loss here and there in the stock market should be expected. It isn't how you deal the gains so much as how you deal with the losses you make along the way. If your ultimate goal in life is wealth then you are missing some of the greatest value that this world has to offer in your pursuit of that goal. Keep your investing goals realistic and honorable-be prepared to take hits along with the wins and learn to roll with the punches. That is what separates a successful investor from a failure as a person.

Posted by David at January 5, 2007 8:46 PM