During the Asia financial crisis in 1997 & 1998, my spouse and I were badly burnt in the stock market . Like many hopeful investors, we too were heavily invested in the stock market with the intention to create some passive income. Unfortunately, all the stocks in our portfolio plunge 10% within a few days. Within a few weeks, our stocks were down by about 50 per cent. We were forced to sell all our stocks and incurred heavy losses. As we were new investors, we were unfamiliar with the stock market’s behavior. We failed to keep abreast with the news and have no feel for the market in the economy in which it operates. To make matter worst, we went into ‘self-denial’ state and refuse to accept the wrong decisions made. Instead of liquidating all the stocks in our portfolio when it drops 20 per cent, we hold on with the hope for the market to correct. We do not have the discipline and the courage to cut lose when the market moves against us.
Many investors have the tendency to hold on to their stocks when the prices are trending up. They are hoping to sell at the highest possible price. Ask yourself, what is the highest possible price? When the prices of stock are declining, we refuse to sell and cut lose. Instead we give ourselves false hope that the prices ‘will’ rise when the market correct. To our dismay, many stocks that have dropped below cost price have never get resurrected for an extremely long time. In some cases, the company either got de-listed from the stock market or went under receivership.
Two months ago, a friend told me that if he were to sell his ‘sick’ stocks, he would be poorer by half a million dollar. He deceived himself by thinking that as long as he did not sell the stocks, his loss is not realized. To me ‘paper loss’ is still a loss. It is irrelevant whether he has realized it or not. There is a possibility that his ‘sick’ stocks may get ‘well’ and move upward one day; but it may not reach his purchased price. Unfortunately, he does not know when his ‘sick’ stocks are going to move up. Are you holding on to some ‘sick’ stocks that have gone below your cost price? If you are like my friends, you may be likely to carry your ‘sick baby’ for a very long time when you refuse to admit your mistake and reluctant to accept loss.
Before you have any false hope on the recovery of your ‘sick’ stocks, perhaps you may want to ask yourself these questions: (1) Is the company making profit? (2) Does the company has huge debts to service? (3) Is there sign of poor cash flow management? (huge long-term debts and creditors figure is low, or too much stock, exceptionally low cash balance, etc. ; (3) Is the company making progress to reinvent itself to generate more sales. (4) Does the company have a capable and reliable management team? Let go of you ‘sick’ stocks and move on with your life if you foresee that the company’s book of account is hopelessly in the red.
Two days ago, I came across a newspaper article entitled: Will you still ‘Like’ Facebook tomorrow? For those of you who have read this article which was first published in New York, you will know that Facebook is currently facing stiff competition from Snapchat and Instagram. According to the article, Facebook shares soared to a new record last Tuesday. “Its stock was up 15 per cent to USD 62.57 last . Facebook announced last Thursday that revenue swelled 63 per cent from the year-ago period.” I quote. When I read this article, I was urged to warn people who are holding Facebook shares to be cautious when the price is moving upward in respond to good news. While some of you may think that it is too early to realized your profit as everything in the financial reports look promising to push the price higher to a new high.
My question is: how high do you think the share price will go before you are willing to sell and take profit? If you are satisfied with making 15 per cent from your Facebook shares, my advice is take the profit and celebrate. Do not wait and hope for the highest possible price for it may not happen, instead it may plunge and move South suddenly.
After Facebook acquired Whatsapp its stock price soared to USD 67.72; according to Yahoo finance reports on 16 March 2014. As usual, stock prices move up and down on news. If you have sold your stock, do not regret as you have already realized your profit and celebrate. However, after doing your analysis, you believe that this stock is going to rise further; you may buy higher and sell at the next high. It may sound illogical, but this is what many professional investors would do if they believe strongly in their chart analysis.
My point is that when you enter the stock market to buy a share, you should go in with the end result in mind. Meaning, after you have purchased your share, you should set your target selling price as well. Decide on the percentage of profit which you intended to make. Regardless of circumstances, you should be disciplined and sell your shares when you hit your targeted price. You should not regret if the share price continue to rise after it is sold. I have learnt this lesson the hard way and I hope you do not make the same mistake as I did in the past.
After I have got burnt in the last Asia financial crisis, I stayed away from the stock market. The pain which my family had gone through is still vivid in my mind. However, I still believe that there are germs in the stock market if only you do your due diligent and search for the winning pick. As for me, I am waiting for opportunity to enter and buy under-value promising stocks in the next financial crisis. When you enter the stock market and buy high performing companies at near bottom price, the down side is limited. Before I buy any stock in the future, I will exercise more care in selecting a stable and promising stock to invest in the long-term.