Being prepared to take a loss

So, I had an interesting chat with a friend over the weekend. He’s been investing for a long time, but due to lockdown I’ve not seen him since I started investing.

I explained that I had quite a few positions that I got into when I first started investing, but hadn’t really done any DD into the companies, and now wasn’t sure that they were sensible choices to hold long term after seeing what happened to them in the mini-crash. But I hadn’t sold them, because they’d lost money and I was “buying the dip” to try to bring the average price down in the hope I could break even before selling them.

One thing he explained me is that it doesn’t really matter at all what price you bought at, if you think it’s overvalued you should sell, whether it’s at a profit or a loss because something changed in the fundamentals. He also said that one of the best things you can learn is how to take a loss without regret, basically learning how to avoid the sunk cost fallacy. He also said that it’s worth being prepared to always take a stop-loss sell on a new position at something like 10% loss, but being happy to accept that it’s OK to take that loss to avoid a bigger loss later on.

Today, I sold off almost all of the shares I thought were overvalued. In all, about a third of the stocks and 16% of the value of the portfolio, and I took an average loss of about 1.5% on those shares (so lost about 0.2% of my portfolio value) by selling them (some were positive - I sold one that was up by 10% and overvalued, but most were at a smallish loss or just over breakeven). And actually, while I’ve lost some money by doing it, it’s amazing how much worry has gone as a result. Just knowing that the stocks I have left are ones I’m actually interested in, and are the one I think will do well after a market crash if it happens, is well worth that small hit.

Obviously, it helped that stocks overall bounced back a lot, so my gains for the day were about 5 times the losses I crystallised, so I guess it was a good time psychologically to do it.

So anyway, I don’t want to give anyone financial advice because this might not be right for you, but just thought I’d share the story about how it might be better to take a small loss now for piece of mind that you’re not committing yourself to sticking with risky stocks during a crash. I’ve still got a lot to learn, but I definitely feel happier now with my more streamlined portfolio.

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Really sensible, investing is often more psychology than science and the way FT displays total P/L all the time, that big red number can really weigh down on your psyche and affect your emotions.

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One of the biggest fallacies that I see all the time on forums is “You haven’t lost anything unless you sell”

This leads to people holding onto losers all the way to the bottom. A more accurate way to look at it is the money was gone when you bought the stock, the question is how much of it can you get back?

I’m doing way better since I stopped trying to buy the dip to try and average down on a losing position, and instead started putting more into the winners

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You should advice all the Amigo holders of this! lol

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I’ve been on both sides of the coin. I’ve held on to stocks that have dropped and kept dropping and sold stocks too early when they kept rising. Both these situations happened quite early on in my journey so I take a lot more care before I open/close positions now. I now form more long term views on the companies and do a bit more DD than when I started out. Also you just naturally learn more about market sentiment and it’s impact on prices which makes you consider a more long term approach.
TDOC I got in at ~180 a while ago thinking this is going to be successful in the next 3-5Y, it rose to almost 300 and I thought I was a genius but markets dumped it down to 140. I am sitting on a loss but I’m holding because my initial holding period was 3-5Y and my underlying views on the company haven’t changed.

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Averaging down is so tempting for many people, it gives them a sense of hope now that the average price they have purchased lowers giving an overall loss % reduction. Unless you have belief that the company is sound and will rise then averaging down is going to hurt all the way to the bottom. I had a share dealing account with Lloyds several years ago and held stock in RSM, that becomes RSM Tenon. At first all was good, then the price started to drop, I purchased more and more as the price dipped lower and lower thinking it must go up soon. I had nothing that indicated it would go up, it was just hope… in the end I got out after losing £2,500 of my hard earned money, others stayed in and lost a whole lot more…

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