Thursday, March 01, 2007

The Natural Impulse

One of the things that I've tried to teach in this BLOG is to be fearless - not crazy mad insane - but to be able to accept a beat-down graciously (albeit with a few choice words bounced off the walls of your office) and then, after taking a deep breath, returning to the ring. This is, after all, what I chose to do.

And this is contrary to the natural impulse which is to hide under the bed and cry. But you have to take your lumps in this business. The market goes up, the market goes down and that is the nature of the beast. You have three choices - 1 - accept it; 2 - day trade and be flat every evening; 3 - on hard drops get some cash and buy more of your best performers.

OK - I'll take door number 3 - now where do I get the cash? On hard drops you take your losses on your poorest performers and use that money to buy more of your best performers. You know which ones they are. Usually they drop only because the general market is taking a hit and they should be the first to recover.

Chances such as the one presented this week don't come very often and you need to be ready to take advantage of them when they do. And I don't mean act impulsively either - I mean do your DD and take your time and weigh all your options and then act - you should be able to make that decision in about 15 to 20 minutes. If the stock you are considering buying is the best in your portfolio what better time to take on more of it than in a depressed market?

Now if that poor performer is one of your idea stocks and you firmly believe that one day it will take off to the heavens - what nonsense - there are 7500 stocks and I haven't a clue how many ETFs that you can invest in. Why are you tying your money up in a stock that may take off someday? You simply keep it on your screen and when you see a volume increase and a price breakout you buy it. So you missed the first 18 cents of the next AAPL - you have a hundred bucks yet to go.

Always keep in mind that you are losing more than money on a losing stock - you are losing the opportunity to be invested in a winner.


Bullish Jim said...

Well said, as always.

As a recently converted stop loss order zealot, I think about opportunity cost all the time. If I hold a stock and it slowly drifts south, the nominal 5% (or whatever) loss I take is nowhere near the actual economic loss. I need to add to that what I could have earned in another pick.


Great content