Sunday, June 07, 2009

Retail Investors' Mistakes #1 - Remembering Entry Prices


There are savvy investors and not so savvy ones. More often than not, whenever friends or friends of friends know that I am in the investment field, they will ask me the same questions. This will be part of a long series on the investing mistakes made by many retail investors.

The most common mistake is the way retail investors remember their entry prices. You know the drill, they bought something 4 years ago at 2.50 and is now at 0.30 - the question being, should they still hold them, when will it go back to their cost price. Investors are caught in a spiral of being locked in by their entry prices. You must ask yourself, you buy because you think the price will go up, if it does not after 1 month, 6 months or 1 year, ... its pretty obvious you were wrong or the source you relied on was wrong.

That is why investors MUST have a cut loss level. Especially if you are the types that rely on hearsay, rely on tips, rely on what your friends tell you or what your remisier said was hot... If you invest mainly that way, PLEASE, have a cut loss level and be strict about it. Think about it, these whispers may or may not be true... it would be very prudent to put in a 15% cut loss level... i.e. if the price drops by 15%, cash out no matter what. That way, your maximum loss on any counter will be just 15% and not the 70% or 80% that many of them are showing to me when they ask me those "silly questions".

If you remember the entry prices as god-given, you will NEVER sell below that price, you are the type that think that prices WILL always come back. Will Transmile come back to RM5.00... probably never. If you had put in stop loss at 15%, you would have dumped Transmile at RM4.25 and will be smiling all the time when Transmile hit RM3.00, when Transmile hit RM2.00 and when Transmile hit RM0.70... but instead you have the reputation of being the "longest suffering shareholder" because you think that RM5.00 entry price was "immaculate conception" on your part, that it was the wisest and most ingenious entry price ever made by any investor who ever lived. If you don't think so, that means you are fallible, then why do you keep holding on and hoping? Put in a stop loss, if you lose 15% already, its so obvious you were wrong in the first place!!!

What if the price go to RM4.00 and then rebound to RM8.00 later on, you might ask. That might happen, but I can safely tell you that that is likely to happen about 1 out of 20 times, meantime for the other 19 times, you will be holding unrealised losses of 30%, 40%, 50% or more. You do the math.

You may miss out on the 1 out of 20 but it will save you a lot of money and heartache. The other is opportunity cost, by holding onto non-performing shares a long time, you are locking up cash into an asset that is losing you money day by day. That cash could have been redeployed into other performing shares.

One should always look at their holdings every few weeks and be honest about the outlook for them. Are these the shares I should be holding over the next few weeks or months? Its not like getting married, once hitched you do not have many alternatives left ... even when a nice looking chick winks at you... Learn to ditch and cut loss.

Don't remember your entry price for too long because the share price will not remember its you at RM5.00. Do not treat the shares you bought as your girlfriend or boyfriend, because they have no memory and no loyalty. The shares will never know that you are hurting.


p/s photos: JJ

7 comments:

TK said...

TRUE

value investing in malaysia said...

It is funnyly correct.

Retail investors love to sell at 10% profit(only to watch it goes up 30%,50% more) but not 10% loss. Its easier said than done. I would like 2 suggest these investors to buy Public Mutual funds when the market GOES DOWN and divide your investable money into several years, instead of one-off.

I knew an aunt who bought several shares at above RM10 before 1997 and still hold at below RM1 now. Its never to late to start practice this cut-loss idea.

Instead of let ur loss mounts and cut profit, why not let your profit runs and cut loss?

huevoscocodrilo said...

Dali > I like your ideas:)

may said...

Sifu Dali, what is ur comments on market trend now? Pls advise, TQVM.

solomon said...

I will stick this at my mobile as a reminder.

But, how can this message get to those auntie and uncles so that they would not regret if market drop again.... or not market is going up and up, most likely would not drop much because somebody are cooking it??

KoSong Cafe said...

Very true, but we are only humans, each with his or her own weaknesses be it 'kiasuism', greed or stupidity.

For every fund manager who is analytical and disciplined in his 10% or 15% cut-loss plan, there are thousands of retail players who believe in themselves, their luck or whatever, which is actually their comfort zone. Call them recalcitrants, if you like, they will never stick to cutting losses at fixed percentage, because they believe their luck will turn any moment. Just like waiting for 3 hours for someone, 'any moment' was the reason.

Just imagine if everyone of us are disciplined enough to cut losses during a bear market... I think the effects will be greater because nobody is willing to hold the shares! So fund managers should thank these silly fools (including me) for what they are.

Mistakes I had many, in fact, too many to mention (think along My Way).

F3l_9 said...

Yea Dali!! I strongly agree with u .. Learning to cut loss now . Learned my mistakes with a list of deadwoods. wakakaka.

Thks 4 yr advice!!