As a dividend investor, I intend to keep all of my stocks for the long-term. This is because I want to earn recurring dividend income from my own stock portfolio. To me, a price drop in stocks that I had already bought is usually a good thing as I view it as an opportunity to accumulate more of their shares at a discount.
But, there are incidents when I sell off stocks after their prices have declined. In those instances, I chose to cut losses instead of averaging down my positions as I acknowledged that I have made mistakes when assessing those stocks. I chose to dispose of them as their business fundamentals were either not that good or they have deteriorated over time.
But, here is the thing when it comes to cutting stock losses. Some say cut loss is easier said than done. I agree. This is because we have emotions and tend to be more emotional than rational when we make investment decisions.
So, how do we deal with this?
Here, in this write-up, I will share 5 ways of how people deal with this emotions negatively and along the way, I would share what I think is a much better way in dealing with the anxiety when facing a cut loss situation. They are as follow:
#1: The Hopeful
Let me sidetrack a bit here.
I like you to imagine for a moment that a girl that you are dating had just texted you to express her wishes of breaking up with you. It does not matter if the two of you had dated for 3 months or for 3 years.
Here, my questions to you are as follow:
‘Are you hopeful that the girl will have a change of heart and would want to get back into a relationship with you in the future?’ ‘If let’s say you are hopeful, the next question is, ‘How long are you willing to wait for her to turn around?’ ‘Will it be over the next 3 months or will you wait for 3 more years?’
Here is an example. Let’s say, you bought Parkson’s shares at RM 2.45 a share in 2011. After holding its shares for 5 years, Parkson reported a fall in its profits as shown below. As of 31 December 2015, its stock price has fallen to RM 0.96 per share. Thus, my question is, ‘Will you hold onto the stock and hope that it could recover in the future?’
If you remain hopeful and retain Parkson’s shares in 2016 for another 5 years, it would prove to be a very painful experience to you. In 2016-2020, the company turned its profits into a string of losses. Parkson’s shares continued to drop over the 5-year period, declining further from RM 0.96 a share to RM 0.23 a share. It had cost you even more if you choose to remain hopeful in that period of time.
As you can see, its stock price had mirrored its stock profits and losses.
In this regard, the questions to ask would be:
1. Wouldn’t it be better to cut losses from Parkson in 2016 at RM 0.96 a share?
2. Could you have done better if you reinvested this capital into better stocks?
#2: The Rebound
There are people who date another girl shortly after they had broken up. This is a rebound if the person has yet to get over with his previous relationship. In the context of stocks, it is likened to a person who buys his next few stocks, without learning from his recent or past investment losses.
I believe, in most cases, a rebound may not work especially if the person fails to learn from his previous relationship and carries the same habits, characters and emotional baggage into his newfound relationship. It is the same with stocks. In this case, if you incurred a couple of losses and continued to buy stocks without learning first how these losses could have been prevented, essentially, you have purchased these stocks in a ‘rebound’.
‘Rebounds’ in stock investing do not work for the long-term because the person often repeats the same habits that has caused him to fail in his last investments into his next investments. As such in stock investing, if you have incurred losses, I would say it is better to ‘take time off’ to learn from other successful investors on their investment mindsets and skill sets. You may want to know:
a. How do successful investors think differently from you presently?
b. What are they doing that are different from what you have done?
c. How are their investment results as compared to yours?
You may adopt their mindset and skill set, if you find them to be much better as compared to yours. Only then, you may come right back into the game to invest in good quality stocks in the stock market.
#3: The Ignorant Player
There is a Chinese proverb that says, ‘It is common to win or lose in battles.’
Yes, there are some truth to this as it is common for investors (including myself) to experience gains and losses from investing. But instead of improving on their skills to enhance their portfolios, the ignorant players fail to see their own need to learn and mature. They just kept on trading stocks frequently as they literally believe that it is common to profit and to lose money in the stock market.
It is likened to a person who dates and breaks up, dates and breaks up and then does the whole thing again and again. His relationships are quite short-lived. He certainly has lots of dating experiences but none of them result in a marriage. It is all for the chase, the thrill, and the fun. But, it brings no meaningful results. It is all vanity of vanities, just like most people who buy and sell, buy and sell, and then, buy and sell stocks again and again in the stock market.
#4: The Quitter
This describes a person who had lost faith in love after a massive breakup. He is reluctant to get into a new relationship for he likes to avoid a potential hurt and heartache that could happen in the new relationship.
It is once bitten, twice shy.
In the context of investing, it is like a person who quits investing after he suffers losses from his investment activities and he places all his cash into fixed deposit (FD) accounts. Yes, FDs do not yield much but it is better than the heartaches of investment losses. So, is this okay? I don’t know. But, I do know that this kind of financial singlehood is definitely not for me as I prefer to learn and mature than to quit. Learning and self-discovery bring more meaning to life than quitting.
So, if you are in this category, you can reflect if financial singlehood is for you or otherwise.
#5: The Blamer
The blamer is one who needs no further introduction.
He blames people especially when things do not go according to his wishes. For example, when the price of his stocks fall, he could blame the stock market, the management team, the government, the pandemic, the stockbroker, the friend, the family member, the guru, and the world for his stock loss. He does not want to own the responsibility of his losses.
Personally, I believe that a blamer should not be investing. It is just not suitable. This is because investing requires one to learn, grow, and mature over time. It is not possible for a blamer to learn, grow, and mature if he remains a blamer.
After all, who likes to date a blamer?
From above, you can see that there are similarities to the stock market and love life. How you handle a breakup can resemble how you handle stock losses. Why is that so? This is because both events are related to emotions. The above are 5 ways of how many people handle stock losses and I think they do not offer a lot of help to investors who wish to recover their losses or to be better investors.
I believe it is better for investors to acknowledge investment mistakes and learn to become better investors. It is one thing to incur stock losses. It is worse if the investor fails to learn from it. He has wasted his lessons. Let that not be you.
Alright, that is it for this week.
If you have any questions / feedback, please post them to firstname.lastname@example.org.
Stay tuned for my latest next week.