Wednesday, February 29, 2012

Which are harder - Selling a losing position or Exiting a winner

Investors need to realise that the way our human brain is wired makes selling a losing position as difficult as exiting a winner. So which do you think is more difficult....or are they both as equally difficult..

We as humans are naturally greedy and for everything we want more. "The more the merrier" as many people say. When a stock is rising (especially in a bull run), you feel good about the stock and this heavenly feeling and optimism is percolating. Even if your original target price on the stock is reached, it is natural to not sell and look for bigger profit. Along with greed is the thought process of why end something when the going is good; why not ride the train and see where it takes us. A friend once asks me this question: "Assuming you buy a stock at S$0.95 and then sell the same at S$1, you make a 5 cent profit. But what if the stock goes on to do well to S$1.20, does the 20 cents difference counts as a "loss" to you?"

Selling a losing position is never easy either. Selling a losing position is seen by many and even for oneself as a sign of giving up. No one wants to lose and as long as you don't sell, you have not "lost" yet as some may proclaim to be. The idea to holding on to a losing position is the hope that it will bounce back one day and you may see light at the end of the tunnel. But what if it don't. Yet, what if it does bounce back one day and you have sold the stock at a loss.

Management, company's goals and your strategy may change over time. So it isn't hard to figure how exiting a winner or selling a losing position may works for you. Across your investment journey thus far, have you ever came across such experiences before?

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