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When to Let Go
Linda Goin
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When do we finally realize we have a loser on our hands? Whether it's stocks, men, a job or a piece of beachfront property in a far-flung northern province, there comes a time when we finally admit we've made a mistake. But how do we cut our losses and move on?
If we can manage to move on with logic rather than emotion, that's great. But it's hard to keep our feelings out of the picture. Loss isn't easy, even when holding on is worse. One way to gather strength and courage is to talk with people you trust about your mistake. Be warned you'll receive a different opinion from each person you talk with about how to move on with your life.
I've recently investigated a lot of material on when to sell stock. I've discovered there are just as many opinions on when to sell as there are on when to buy. One thing I learned from everything I read was that the stock market consists of buyers and sellers who think just like you and me. They're all human, and they all operate with a combination of logic and emotion - just like you and me. How are we to make decisions in such a volatile atmosphere? Who can we count on? What can we trust?
There are only two guarantees to the market and to stock behavior. One is that there is constant change. The second guarantee is that stocks will only move in three directions: up, down, and sideways. Each movement made by a stock is noted, and eventually a pattern begins to form. This pattern becomes a stock chart. The stock chart is our friend.
If you take all the charts of the stocks you've been watching and tape them to a wall, you'll see these patterns. You'll see peaks and troughs, similar to a mountain range. Some of you might see something that resembles the Sahara desert - flat. Step closer. Even the flatliners have some rocks and potholes. On the other hand, you might see a few charts that resemble the Grand Canyon, with deadly drops and steep climbs.
From a far-away vantage point, you can view the overall cycle, or trend of the stock over a period of time. If you have a magnifying glass, you'll see little hills and dales within the peaks and troughs. These are the weekly or daily transactions that make the market go 'round.
All these up, down, and sideways motions indicate trades based on supply and demand, and all the supplies and demands are made on logic and emotion. These patterns can be used to our advantage when buying or selling (now I know what my dad meant when he said to "watch that stock" before trading...).
Each of these moves has a name and an application. An "uptrend" is when a stock climbs out of a trough and maintains a steady course upward. This doesn't mean there won't be more troughs, but if the stock is in an uptrend, you'll see a series of higher lows and higher highs.
If your stock is in a "downtrend," you'll see lower lows and lower highs. This downtrend could occur because of lack of interest from other traders, which creates low volume. If your stock sees an increase in volume, and the stock continues on a downward trend, you have a huge problem on your hands. This means everyone is selling, and you can almost bet a panic will develop in short order.
We've seen this happen several times over the past year. Sometimes the market will halt trading in a stock when it begins to plummet from news or gossip. Some of the news has been relevant. In a few instances the plummet was based on a hoax. Either way, the stock is definitely "headed south."
If this stock represents a decent company with fixable fundamentals, during the downtrend and at the bottom of the trough this stock will be labeled "oversold." Hopefully, a few traders will recognize the stock as viable, and the volume will increase, pushing the stock to the upside. If you don't see the "oversold" comment in analyst or news ratings, it could be the stock is just a plain old loser. If you hesitate a few months to sell a company with a downward trend you're in for a tough row to hoe, because the buyers won't be there to pick up your shares. You'll need to watch the chart to see any indication of an uptrend (higher volume) before you find interested buyers.
Many opinions I've read state one needs to sell when an 8% loss from purchase price is recognized. This doesn't mean I'll sell when I recognize an 8% loss from purchase price, but it does mean I'll continue to see a downward trend in my stock until all the "8 percenters" who rely on this advice are through selling off. If you have the time to deal with this percentage indicator, more power to you. I would be concerned that the 8% loss in the current market might simply mean a dip due to volatile moves. When I get spooked with nasty dips in my stock purchases, I just haul out the one- or two-year chart to assure myself this isn't part of a downward trend.
Last week, I took Uncle Sam into account on sales. This week, I'm going to offer an opinion on serious downward trends and selling for emergencies: when you need to get out of the market, Uncle Sam takes a back seat. If you've lost money, and you need the remainder for payments on bills, just do it. Your credit is much more important than your attachment to your portfolio. You can count the losses if you have enough deductibles at tax time. On the other hand, if you've made a profit it's better - in my opinion - to take the gain and pay the taxes than it would be to take future losses in a stock that's in a swan dive to the bottom of the pond.
When you cut losses, the plan is to have a plan. Plan to be here next week, when we talk about rollovers and washing machines.
Until then,
Linda Goin
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