Friday, 1 March 2019

Mistakes Investors Make in the Stock Market #1: Being Penny Wise and Pound Foolish

No one wants to lose money. Yet many investors make losses in the market. While it’s not abnormal to make losses per se, many investors increase their losses due to their own behaviour. They do so by hinging themselves to their buying prices. If a company has started to perform poorly, investors still want to somehow get back their buying price, which may or may not come. 

Even if the stock hovers about their buying price, they don’t want to sell the stock so that they don’t make any loss at all. Often they find that after coming close to their buying price, the stock moves several percentage points down. You can imagine the frustration. Eventually, they decide to sell at a much larger loss. That’s being penny wise and pound foolish.

The stock price is a dynamic element. It changes every second. You can’t rely on it to act in your favour. The solution to the problem is to be comfortable with small losses. Consider them as insurance against a sudden fall in the stock. If you must exit a stock and Mr Market offers you a price a few points lower than your buying price, don’t hesitate to accept it. Mr Market may not offer you the same price tomorrow.

Another useful tactic is to sell in tranches. For instance, if you are down 20 percent, sell half of your holdings. If the stock appreciates and you are down just 10 per cent, sell the rest. Your overall loss will be less as compared to if you had sold out entirely when you were down 20 per cent.

Losses in the market are perfectly okay. You can’t expect to make money on all your stocks. Some will indeed go sour. In such cases, formulate a loss-containment strategy and don’t be too finicky about getting back your buying price.

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