LogFAQs > #942105263

StartTheMachine posted...

No doubt about this. When I chased it during its sudden surge I was putting most of my money on it, GNUS style. When it went down I really should have cut my losses, even as badly as a 4k loss would have hurt. I stuck with it because I believe in it and absolutely still do, but I realize that the whole "you only lose money when you sell" mentality is asinine for speculative stocks like this.

I mean, I fully expected it might drop to the levels I originally bought it at (2.12) when the end of June ER didn't have the Computex numbers or forward guidance. And now I could now be putting my capital back into it at these levels. I guess the reason I didn't is because as likely as I thought it might be that it would keep bleeding out, stocks are still unpredictable and I would've been mad if I sold and it suddenly surged again if there was PR. I didn't 100% know I would be given the opportunity to buy again this cheap, I just thought it likely.

It's pretty tricky, and I'm not sure there's even any takeaway I can have from it. Cut losses quickly even at a significant chunk of your portfolio, and even when it's a company you've researched for hours and fully believe in? Hard to swallow.

Actually, one good takeaway is that if I ever double down on a surging stock I need to get out just as fast. There was a point that my account value was at 36k and I could have closed my position. Now it's half that.

I'm not saying to sell a position in a fast moving stock quickly, whether it moves up or down. I'm saying to avoid making that position so big that it's potentially portfolio-destroying in the first place. If you limit opening a position to say, 1/3 of your equity, one big downward move in a stock won't do a debilitating amount of damage.

Now you may say, but then a big move up doesn't give me as much reward. True, but you can use the other 2/3 of your equity to buy other stocks. Those can move up too. It's much less likely that all 3 of your stocks suffer big downward movements at the same time, so you don't have to worry so much about cutting losses or taking profits too early and can be more objective in your decisionmaking and comfortable. The thing is a -50% move is a much bigger deal than a +50% move. If you suffer a -50% move, you need a +100% move to make back what you lost!

3 is way less diversified than most people would advocate but I think it already captures most of the gains of diversification. That is, if you were to go from 1 stock to say, 100, I think the move from 1 to 3 already provides probably 60%+ of the variance reduction that you would get from going to 100 stocks. Warren Buffett has advocated holding as few as 3 stocks that you've heavily researched and strongly believe in rather than holding a lot more in the name of diversification, because the number goes up you have to invest in companies you don't believe as strongly in, losing advantage.

But if you want less risk, maybe go to 5-10 stocks. If you're one of those people who wants to hold 30+ stocks you might as well just buy SPY and save yourself the time and effort.


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September 1, 2003; November 4, 2007; September 2, 2013
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