Here is an emotional trait that tends to bog down many investor friends leading them to make irrecoverable damage to their portfolios. Though many agree to this, they lack the discipline to act on it.
Post buying a share, if the stock price goes below your purchase price, what do we do? Hold until the stock regains the losses, right? That’s exactly what 90% of the investors do. It’s just sad that investors are not able to digest the fact that either they made a mistake in selecting the stock or the industry / project of the company has altered etc, that is, the very reason for which the stock was bought no longer exists. This is exactly what happened during the earlier days (year 2000) when the price fell drastically and people continued to hold it thinking the price will bounce back. All lost big time!
Firstly, there is absolutely no guarantee that a stock will ever recover to its original levels. Secondly, do understand that for a stock to reach back where it once was, the percentage gain must be much higher than the fall it suffered. For example, if a share of Rs 100 falls to Rs 50, the loss is 50%. However, for Rs 50 to again go back to Rs 100, the gain needs to be 100%!
Also, liquidating your stuck investment will create the much-needed liquidity for one to redeploy it into stocks that have more potential to grow and build wealth. Those who do not, end up with a long list of stocks wherein the effectiveness of any one stock is diluted. For example, by not exiting loss making stocks one may end up with a list of 100 stocks in the portfolio. Now, even if the person has a 5-time multi-bagger in this list the portfolio will merely increase by just 4%!! Isn’t it? (By assuming equal weight-age).
When someone advised some subscribers to book some loss, we received some flak stating why we are advising to sell in a loss. Do note, it is the very intent of wanting to make the subscriber’s money grow that leads us to advise exit from some of the slow-moving stocks.
Hope this blog reiterates this simple, yet very important principle and you revisit your portfolio to take non-emotional and wise decisions.