In this article I will give you a few rules to keep in mind when selling your investment at a loss would be the best thing you can do.
The rules will not only help you to keep the loss small but also give you ideas to formulate a selling strategy for your investments.
Your reason for making the investment
Once you have done your homework on a company, write down your concise reason for buying.
Should the share decline more than 15%, re-evaluate the company to see if the original reason for buying is still in place. If your original reason for buying has not changed, either buy more or remain invested.
You may ask a friend or other trusted investor to take a fresh look at the share to see if they come to the same conclusion. This is also a great way to objectively test your reasons for staying invested.
Another rule you may want to consider, after confirming your analysis is that the position is never a hold. It’s always a buy or sell – the position has either become more attractive or it has not.
Should you use this selling strategy, you may want to implement a strict rule that if you were wrong about the reason for investing, you should exit the position with no questions asked. Never invent new reasons to hold a position when the original reasons are no longer applicable.
Holding onto a position simply to recover your initial capital is usually a recipe for even greater losses.
Selling when you are negatively surprised by an investment is another factor to consider. If you are truly surprised, it usually means management is also surprised, and there may be something fundamentally wrong with the business.
Leave emotions out of it
Should it happen that management really makes you angry, you may want to put the investment away for a while and not do anything. Try not to take action just because of your emotions.
It has happened in the past that the management decisions made me angry, by voting through a takeover defense, for example. My natural reaction would be to just sell the stock and move on, but if I had reacted in that emotional way, it would have cost me a lot of money.
If you take action because of an emotional reaction, it is likely that a lot of other investors are thinking exactly the same. This means that everyone is abandoning the investment at exactly the same time. I have found it better to wait a while, even if I am still angry.
When your nerves can’t take it any more
Have you ever bought a stock that has taken you for an emotional roller-coaster ride? Instead of increasing in value the price dips and bounces every day.
If holding the stock makes you so uncomfortable that you can’t sleep and you only worry about how much money you have lost or made in a single day, you are being distracted.
When that’s the case, consider holding less volatile stocks or decrease the size of your position. Know yourself. Don’t hold stocks that you can’t hold comfortably.
Percentage drop in price
This strategy is the simplest of all, but also much more difficult to implement than it looks.
Sell after a fixed percentage decline in price. This level can be set by looking at the recovery table mentioned above, or can arbitrarily be set according your pain threshold.
From experience I can say that sticking to such a strategy is much more challenging than it may seem at first. The difficulty in selling at a certain percentage increases exponentially, depending on the amount of research you have done before investing in the share. The reason can be attributed to the behavioural problems associated with selling.
Tim du Toit is the editor of EuroShareLab. The purpose EuroShareLab is to share knowledge and ideas gained in over 20 years of investing experience and continuous learning to help other self directed investors on their investment journey.
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