This one word—selling—describes what traders and investors have tried to do successfully since the Dow Jones Industrial Average was created in 1896. Vast market sums have been lost by failing to liquidate equity positions in a timely manner. When I do my chart analysis on my holdings and conclude that a particular stock is in a weakened state and should be sold in whole or in part, I almost always sell the position “at the market” to have the order immediately executed. Hey, I want my capital returned to me ASAP! I don’t try to extract an extra several cents in a position worth thousands of dollars. That’s not a sensible risk–reward strategy to me. Don’t try to best the market by reaching for that additional bit. It’s not worth it. I repeat: it’s not worth it, and the times you successfully get that extra small bit will be greatly outweighed by the times (or possibly even a single instance) in which you fail to do so. I covered this premise in chapter 23, “Stop It,” but it bears repeating. It’s like the bull–bear market discussion we had previously; a single negative period can wipe out multiple positive ones. You need to completely comprehend this market tenet. It can be financially ruinous not to.
Selling a stock is not the same as buying a stock. In the latter situation you are parting with your money; in the former you’re getting it back. I consider the former more important. I think this point is sometimes lost in the investment decision-making process. When it comes time to end a failed marriage or an unsuccessful business arrangement or sell a piece of property that’s weighing negatively on you, does it pay to hold out for slightly better terms at the risk of continuing down those detrimental paths? Since you’ve already made the choice to remove yourself from those situations, is it worth the extra aggravation? Or do you just “want out” so that you can relieve yourself of the stress and move on? I’d always choose the latter option. Personal situations like these aren’t just emotionally draining; they simultaneously impede you from adopting a better mind-set for future success in your other endeavors. It’s a double-edged sword. Both hurt! As I opined in chapter 10, “Mirages,” step back and look at the big picture first. It often allows for clearer viewing.
If you’re unsure about whether to sell a stock, you can consider selling a portion of it—the amount depending on how bearish you are on the shares, whether you are overweighted or underweighted in that position, and whether it’s costing you sleep at night. Then you can get a thorough research review from a respected technical analyst (or use other research avenues because the choice is always yours), and consider your risk management menu of choices. Among them is setting multiple stop orders below the market price on other portions of the position.
A goal here is to attempt to be out of a successively greater percentage of your equity position as it weakens in price, so that if the stock continues to slip or accelerates its price decline, you’re selling, for example, the remaining (and hopefully minimal) portion or portions of the position and not just beginning the liquidation process. When you’re selling a position on the way down, each prior sale at a higher price looks good in retrospect and makes you realize the value of this approach. This isn’t the conventional investment wisdom, which usually emphasizes “buying the dips.” But what happens when the dip turns into a rout? You don’t hear an answer for that one. Most importantly, this approach helps to preserve your capital, the key ingredient in the investment business. It should be most helpful with respect to declines that occur over a sustained period of time, and those that begin in the early stages of a primary bear market.
Relationship-wise, once you see the signs of a business partnership souring or cracks develop in a close personal relationship, you’re probably going to start to distance yourself from those situations.
In those instances when you sell, or are stopped out of, the first portion or portions of your position and the stock proceeds to rebound, chances are that you’ll still be holding the lion’s share of the stock. This could occur because the stock’s long- term uptrend has not been broken or a primary bull market is in force.
Finally, if you’re in a quandary about whether to sell a stock, ask yourself this question: “Will I be more upset holding the position and seeing it fall multiple points, or selling the position and watching it rise multiple points?” This should help simplify your decision-making process about whether to hold or sell the stock. I ask myself this question all the time. If the latter is your answer, then strongly consider employing some type of risk management approach to help guard against the southerly side of the investment equation. One of the ways I can tell that I really like the chart formations on a particular name is when I tell myself that I’d rather lose money buying the shares than not take the (sensible) risk in the first place. It’s the same premise when selling a stock: if the chart pattern is negative, I’m focused on getting out of it. I don’t care about missing the upside. Aren’t these recipes for life as well, when we say to ourselves that we’d rather risk being disappointed in a promising relationship than not pursue it, or not become involved in a relationship we deem risky despite some possible benefits.
Moral: When you decide to liquidate a position, it’s your money that you are removing from the market. Take it back! It’s more important to save capital in down markets than to make it in up markets. If you expect to survive the market’s sustained downdrafts, you must be willing to admit that the best opportunity to sell certain positions has probably passed and sell or start selling the position “at the market.” It’s your financial future. It’s the same principle in a relationship. When after thoughtful consideration you decide that the best times are in the rearview mirror and a change for the worse has either begun or looks like it’s in the offing, wouldn’t you start removing yourself from that situation?
(To be continued...)
This excerpt is taken from “Relationship Investing: Stock Market Therapy for Your Money” by Jeffrey S. Weiss. To read other articles of this book, click here. To buy this book, click here.
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