Saturday, May 14, 2016

The Art Of Cutting Your Losses

One of the most enduring sayings on Wall Street is "Cut your losses short and let your winners run." Sage advice, but many investors still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it worsen.
No one will deliberately buy a stock they believe will go down in price and be worth less than what they paid for it. However, buying stocks that drop in value is inherent to the nature of investing. The objective, therefore, is not to avoid losses, but to minimize the losses. Realizing a capital loss before it gets out of hand separates successful investors from the rest. In this article, we'll help you stand out from the crowd and show you how to identify when you should make your move.

Reasons Investors Hold Stocks With Large Unrealized Losses

In spite of the logic for cutting losses short, many small investors are still left holding the proverbial bag. They inevitably end up with a number of stock positions with large unrealized capital losses. At best, it's "dead" money; at worst, it drops further in value and never recovers. Typically, investors believe that the reason they have so many large, unrealized losses is because they bought the stock at the wrong time or it was a matter of bad luck. Rarely do they believe it is because of their own behavioral biases.
Let's look at a few of these biases:
  • Stocks Always Bounce Back - Don't They?
    A glance at a long-term chart of any major stock index will see a line that moves from the lower-left corner to the upper right. The stock market, over any long time period, will always make new highs. Knowing that the stock market will go higher, investors mistakenly assume that their stocks will eventually bounce back. However, a stock index is made up of successful companies. It is an index of winners. Those less successful stocks may have been part of an index at one time, but if they've dropped significantly in value, they will eventually be replaced by more successful companies. The indexes are always being replenished by dropping the losers and replacing them with winners. Looking at the major indexes tends to overstate the resiliency of the average stock, which does not necessarily bounce back. In fact, many companies never regain their past highs and some go bankrupt.
  • Investors Do Not Like Admitting They've Made a Mistake
    By avoiding selling a stock at a loss, many investors do not have to admit to themselves that they've made a judgment error. Under the false illusion that it is not a loss until the stock is sold, they elect to continue to hold a losing position. In doing so, they avoid the regret of a bad choice. After a stock suffers a loss, many investors plan to hold onto it until it returns to its purchase price. They intend to sell the stock once they recover this paper loss. This means they will break even, and "erase" their mistake. Unfortunately, many of these same stocks will continue to slide.
  • Neglect
    When stock portfolios are doing well, investors often tend to them like well-maintained gardens. They show great interest in managing their investments and harvesting the fruits of their labor. However, when their stocks are holding steady or are dropping in value, especially for long time periods, many investors lose interest. As a result, these well-maintained stock portfolios start showing signs of neglect. Rather than weeding out the losers, many investors do nothing at all. Inertia takes over and, instead of pruning their losses, they often let them grow out of control.
  • Hope Springs Eternal
    Hope is the belief in the possibility of a positive outcome, even though there is some evidence to the contrary. Hope is also one of the primary theological virtues in various religious traditions. Although hope has its place in theology, it does not belong in the cold hard reality of the stock market. In spite of continuing bad news, investors will steadfastly hold onto their losing stocks, based only on the faint hope that they will at least return to the purchase price. The decision to hold is not based on rational analysis or a well-thought-out strategy; and unfortunately, wishing and hoping that a stock will go up does not make it happen.
Realizing Capital Losses

Often you just have to bite the bullet and sell your stock at a loss before those losses get bigger. The first thing to understand is that hope is not a strategy. An investor has to have a logical reason to hold a losing position. The second point is, what you paid for a stock is irrelevant to its future direction. The stock will go up or down based on forces in the stock market, the stock's underlying fundamentals and its future prospects.
Let's look at a few ways of assuring a small loss does not become "dead" money or turn into a much larger loss.
  • Have an Investment Strategy
    Having a written investment strategy with a set of rules both for buying and selling stocks will provide the discipline to sell stocks before the losses blossom. The strategy could be based on fundamental, technical or quantitative factors. 
  • Have Reasons to Sell a Stock
    An investor generally has quite a few reasons why he or she bought a stock, but typically no set boundaries for when to sell it. Don't let this happen to you. Set reasons to sell stocks, and sell them when these things occur. The reason could be as simple as: "Sell if bad news is released about corporate developments or a price target." 
  • Would You Buy the Stock Now?
    On a regular basis, review every stock you hold and ask yourself the simple question: "If I did not own this stock, would I buy it today?" If the answer is a resounding "No", then it should be sold.
Tax-Loss Harvesting Strategies

A tax-loss harvesting strategy is used to realize capital losses on a regular basis and provides some discipline against holding losing stocks for extended time periods. To put your stock sales in a more positive light, remember that you receive tax credits that can be used to offset taxes on your capital gains.

Conclusion

Taking corrective action before your losses worsen is always a good strategy. In investing, avoiding losses entirely may not be possible; successful investors accept this and try to minimize their losses rather than avoid them. Selling a stock at a loss and receiving a tax credit is one benefit you will receive. Selling these "dogs" has another advantage too - you will not be reminded of your past mistake every time you look at your investment statement.

102 comments :

  1. pls share your view on cent enka, surya roshni

    ReplyDelete
    Replies
    1. do you track PPAP Automotives... pl share your views

      Delete
  2. Dear VP sir thanks a lot for spending your valuable time to guiding us. Willing to know your views on... 1. Era infra.
    2. Amarjothi spinning
    3. Cupid.
    4. Dr lal path lab

    Thank you.

    ReplyDelete
    Replies
    1. Amarjothi's past few quarters were below expectation.

      Lalpath lab is a cash rich debt free company operating in a sector with good potential but valuation is not too cheap at CMP.

      Delete
  3. Valuepick Thanks for posting this highly informative article. Is it possible that we get an indication as to when to exit a stock? That could help thousands of small investors to make a little money

    ReplyDelete
  4. sir pls give ur views about
    anant raj industries
    jk paper &
    subex systems

    ReplyDelete
    Replies
    1. As I said earlier Subex is a turn around story , but the FCCB converted shares are dumped into market immediately after conversion which is creating lot of pressure on price movement.

      Not tracking other mentioned stocks.

      Delete
  5. Dear VP Sir Can we have your views on Kitex Garments at CMP? The stock is not moving up despite excellent performance in March 2016.

    ReplyDelete
  6. Sir why u hidden ur identity. A genuine person is always have some name,address.

    ReplyDelete
  7. Dear

    I am not compelling anyone to consider me as a genuine person . I believe, rationale for investing in a company and one's belief in that rationale is more important than the name and address of person suggesting a stock.

    ReplyDelete
  8. . I agree with valuepickr point of view it's the content which decides the genuitity. I am sure all of us who are following valuepickr advise just because of its content not because of any personality.I am quite sure that voices like these are exceptional so that itself is the answer. Thanks

    ReplyDelete
  9. Sir please guide on prospects of Sterlite technologies.

    ReplyDelete
  10. We are realy missing our earlier 'VP' . . !!!

    ReplyDelete
    Replies
    1. If there is a change in rules , we need to change accordingly.

      Delete
  11. Hi Sir,

    What are your views on Gati after it posted decent results ?

    ReplyDelete
  12. VP sir, 1) Snowman Logistics is hovering near its IPO price after post-listing sharp moves. Please give your view for its long term prospects
    2) Your opinion about Intellect Design Area after latest Q4 results please..

    ReplyDelete
    Replies
    1. Snowman is in a potential sector but its price is not cheap.

      Not tracking Intellect Design

      Delete
  13. Dear VP sir

    Requesting your views on Filatex India? With a fantastic Q4 and capacity expansion likely to add to top line in Q1 wondering whether this is a investment grade stock. Thank you

    ReplyDelete
    Replies
    1. I have no idea about its promoters hence no comments.

      Delete
  14. Sir whats your opinion on
    1. Take solution
    2. inox wind
    3 astra microwave
    4. lycos internet
    5.texmaco rail
    6. tree house - zee learn merge 1:5

    ReplyDelete
    Replies
    1. Tracking only Astra Microwave which already suggested @ Rs.35.

      Delete
  15. hi VP sir,
    Could you please share your latest views on Nath bio-genes, Dion Global & Magna electrocast ?

    Thanks,
    -Srinivas

    ReplyDelete
    Replies
    1. If there is no pricing power for a sector/company , it is difficult to grow beyond certain level . Few states already implemented price cap for seeds, if more and more states follow the same it may negatively impact the margin of all companies operating in this sector.

      Dion Global is not performing up to expectation.

      Valuation of Magna is cheap , but sector revival is the key point to watch.

      Delete
  16. Sir, Your views on Sequent scientific results ?

    ReplyDelete
  17. Replies
    1. No change in previous opinion on above two cos.

      Delete
  18. Sir irritating persons are always there. They see the world as they are. We can't blame them. It's just the world with such people. You have always forgiven them.
    Regards

    ReplyDelete
  19. Dear VP Sir Can we have your view on capital trust and salzer electronics at CMP?

    ReplyDelete
    Replies
    1. Capital trust already turned as a 10 bagger , prefer to book profit.

      Delete
  20. VP sir,

    1. What are the key problems for Orchid Pharma.... Do you think the worst is behind and expect better results


    2. SKM Egg : should it be sell for now or accumate for long terms 3+ years horizon
    PE 7/8 times
    Market Cap 230 CR Vs Revenue of 270/280 Cr
    Debt-to-Equity below 1

    Though there are head winds in terms pressure on pricing and new order in addition to increase in cost, these seem temporary which should get resolved in 2/3 qtrs.

    So I feel it is a good loong term bet. Please share your views with these point in mind and if there is something very averse that we should worry about.

    ReplyDelete
    Replies
    1. Key problem of Orchid Pharma is its debt.

      There is no doubt about the quality and hard work of the promoters of SKM. But some factors are even beyond the control of any promoter and it may happen unexpectedly . Promoter himself bought the shares of SKM around Rs.140 last year from open market which indicating even they do not expect a bad business environment( Increase in raw material price in India and fall in the product price in overseas market)so soon.It was really unexpected and it may be corrected over a period of time . Company has changed a lot in last two years( turned to debt free status, pledge release ..etc)and the good days may come again when this cycle change .The question is whether we will get a better chance for entry due to current negative business environment or not. I thought that we will get such a chance and hence suggested to pare exposure when it was @ Rs.120 after touching Rs.220. You may ask why I not suggested when it was @ Rs.220 and I have only one answer for that - the change in situation was too fast both in case of raw material price and product price and Japanese business situation.

      Delete
    2. Thank you VP for your detailed rationale on SKM exit-re-entry at lower level (when climate is conclusive) strategy. I feel SKM problems are short term 2/3 qtrs and 70 should be a good level to start accumulating.

      I am a big fan of your analysis and thinking and miss the sharing of posts\review of new companies. Is there anything that you have analyzed in the past, available @ cheaper rate and fundamentals are still intact\condusive like Magna El, Lakshmi foods, Aimco , Pioneer, etc.

      Thank you once again for your honest and sincere guidance.

      Delete
  21. Sir, Kindly have your views on Sakthi sugars, with ARCIL taking over half of debt with write-offs and networth of the company increasing ?

    ReplyDelete
  22. Sir, u r views on rushil decor Ltd

    ReplyDelete
  23. Sir, alps industries has been declared a sick company. What impacts do you foresee with these developments?

    ReplyDelete
    Replies
    1. It is not a new development , declared as sick in 2010 itself.

      Delete
  24. Dear ValuePick,

    Please share your views on Tyche Industries.

    Thank you.

    ReplyDelete
  25. MIC electronics presentation
    http://energy.gov/sites/prod/files/2016/02/f29/atluri_global_raleigh2016.pdf

    ReplyDelete
  26. Sir whats your view on Cupid, Dabur and Hexaware?

    ReplyDelete
    Replies
    1. Not tracking Hexaware.

      Dabur for passive investors.

      Cupid is improving

      Delete
  27. i just don't understand how people cannot see the genuineness just by reading this blog. Every post by you says out loud how genuine, sincere and a person of principles you are, and that is the reason a lot of us follow you. Thanks always for the selfless service you do.

    ReplyDelete
  28. sir,please share your views on R System International? r u tracking it?

    ReplyDelete
  29. Greetings Sir ,

    Could you please share views on ur old recommendation shemaroo entertainment . iam holding from @184

    ReplyDelete
    Replies
    1. Shemaroo is @ more than 50 % above from suggested level. Neutral at CMP.

      Delete
  30. Dear VP sir

    Your views on IFGL for long term? Can we enter at current price?

    ReplyDelete
  31. Can you please advise on sakthi finance? It has a good dividend yield and decent growth.

    ReplyDelete
  32. VP Sir,
    Great answer to SKM question raised by follow reader. Yes the situation turned very fast and everyone was caught by surprise. The promoter who is at the helm of affairs on day to day work couldn't see it coming and hence small investors like us are no match to it.
    But the biggest bright spot among them is the promoters are honest and hard working and looking ways to increasse the biz. I am holding from 100 levels and NOT sold a single share till now as I am sure that tide will change and may get caught with surprise. I have seen many times that you sell share and things change quickly.

    We are really thankful for your guidance and hope to see you guiding us in some form or other.

    Pls do consider small investors like us and share your ideas.

    God Bless.

    ReplyDelete
  33. Sir, by any chance you track Majesco ? if yes, pls share views.

    ReplyDelete
  34. Hi Sir,
    Please suggest us some good stocks.. I have been watching your page since 1 year and no new companies were suggested.. Ur suggestions are very helpful

    ReplyDelete
    Replies
    1. Not recommending stocks wef: June 1,2015 due to SEBI's new rule

      Delete
  35. Dear Sir,
    I got DLF way back in 2008 @ 440 level.. Later it was never traded at that level.. Do you see any future in this stock.. should I sell and invest in any other stock..Thanks in advance.

    ReplyDelete
  36. Sir, ur views on Harrisons Malayalam Limited

    ReplyDelete
  37. Sir, I am flowing your blog since 2015 when I come to know about you. My bad luck is you are stopped suggesting stock ideas when I come to know about you. I referred your previous stock ideas. All your stock ideas are given excellent returns to investors with good analysis. I know you are not giving stock ideas for investment due to SEBI regulations.

    I am a long term investor. Can you share with us how you develop these skills. How do you do stock analysis? Can you suggest anything for our self-analysis.

    ReplyDelete
    Replies
    1. The important points to be checked is sharing on Saturdays

      Delete
  38. Dear VP,
    I see your comment on Subex Systems as Company could be turn around story. Recent Quarter results looking better. Present Subex promotors are having just 0.4 % ( 974044 shares) of shares in the Co. How risky it is to invest when promotors are having such low holding of shares in Co. Any views on this of great help.
    Thank You.

    ReplyDelete
    Replies
    1. It is run by a professional board.

      Delete
  39. Dear VP Sir,

    Your current views on cybertech based on results

    Thanks in Advance

    ReplyDelete
  40. Dear VP,

    Kindly share your views on Bharat Gears Ltd.

    Regards,
    Hiral K

    ReplyDelete
    Replies
    1. Not tracking above mentioned stocks.

      Delete
  41. Sir,
    Any views on Sequent Scientific at current levels? Seems attractive at CMP :-)

    ReplyDelete
    Replies
    1. Adjusted to stock split ,it is still 5 times higher from suggested rate.

      Delete
  42. Hi Sir,

    Please share your views on Eros media? Do you feel its recent fall is reasonable?
    Aneesh

    ReplyDelete
    Replies
    1. Not tracking it after the recent issues.

      Delete
  43. Dear Sir,
    Valiant Communication result is out. Key Hightlights: Revenue up 21% on yoy basis, 775% on qoq basis. Profit up from loss of Rs 13 Lacs to profilt of 21 lacs.
    I could not understand the statement "Due to favorable decissions, the contingent liability has been reduced to 69 lac from 639 lac". Is it related to the tax they owed?
    Would like to have your view on this stock sir.
    Regards,
    Jagadish

    ReplyDelete
    Replies
    1. Reason for decrease in contingent liability explained in the notes/press release part attached with result , please refer.

      Delete
  44. sir would you like to have look at Rpower after the uday scheme implementation?

    ReplyDelete
  45. Dear valuepickr sir you have given enough explanations with regard to skm. Everyone knows the risks involved in investing in shares. Atleast you have warned against averaging and recommend to exit that is also a superb advice as business environment can change anytime . please carry forward your selfless service in this forum we all are indebted to you for sharing of knowledge. Thanks

    ReplyDelete
  46. Hi Value Pick Sir, Today Valiant Communications announced very good results. Your valuable views on the results as I am holding good quantity of it.

    ReplyDelete
    Replies
    1. Yes, result is improving and more than that order booked jumped from Rs.39 lac to Rs.22 Cr which is more important . Contingent liability also decreased sharply.

      Delete
  47. Dear VP Sir, Shaily Engineering posted decent March quarter number but a bit lag at top line which can be due to global headwinds.The worrying part was at 'Other Income' part which is still not clear. Would you please share your thought!

    ReplyDelete
    Replies
    1. Other income is almost 50 lacs higher than the same of last year same quarter.

      Delete
    2. True. But overall how do you see the result. YOY seems on the line.

      Delete
  48. Dear VP
    Any comments on Mindteck results?

    ReplyDelete
  49. Sir, the subsidiaries have caused a dent to Cox and Kings financials, do you think it can be a recurring pattern.

    ReplyDelete
    Replies
    1. Company is going through a business restructuring and the huge loss is due to Goodwill amortisation of a subsidiary which sold recently and it is one time in nature.

      Delete
  50. Replies
    1. A decent company in this sector but business is cyclical.

      Delete
  51. Dear VP Sir

    Kindly let us know your view on Mindteck and Valiant communication results.

    Best regards

    Sreejith G

    ReplyDelete
  52. sir please share your views on DQ entertainment.

    ReplyDelete
  53. Dear Sir,
    YOur view on your one of earlier recommendation Lokesh Machines.

    Further please share your views on repro India

    ReplyDelete
    Replies
    1. As you are aware Engineering industry is currently going through a not so good business environment , It is expected to perform once there is revival in core sector.

      Delete
  54. Dear VP Sir, Posted the same earlier too, but un-answered. Trying again.

    I think Pioneer investors would like to know your valuable opinion if you are POSITIVE on the results and whether we can HOLD for Long term. Kindly advice. Have a great day.

    - On behalf of all PEM investors. Darshan S.

    ReplyDelete
  55. Sir,
    Please state your view on Zicom. Is there any negative news about company which common investors don't know?

    ReplyDelete
  56. Dear VP sir
    I bought Bhusan steel @68 200. so what is your opinion. Shall i exit or wait??

    ReplyDelete

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