Being prepared to take a loss

First Time Investing šŸ£
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So, I had an interesting chat with a friend over the weekend. Heā€™s been investing for a long time, but due to lockdown Iā€™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 hadnā€™t really done any DD into the companies, and now wasnā€™t sure that they were sensible choices to hold long term after seeing what happened to them in the mini-crash. But I hadnā€™t sold them, because theyā€™d lost money and I was ā€œbuying the dipā€ 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 doesnā€™t really matter at all what price you bought at, if you think itā€™s overvalued you should sell, whether itā€™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 itā€™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 itā€™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 Iā€™ve lost some money by doing it, itā€™s amazing how much worry has gone as a result. Just knowing that the stocks I have left are ones Iā€™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 donā€™t want to give anyone financial advice because this might not be right for you, but just thought Iā€™d share the story about how it might be better to take a small loss now for piece of mind that youā€™re not committing yourself to sticking with risky stocks during a crash. Iā€™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 ā€œYou havenā€™t lost anything unless you sellā€

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?

Iā€™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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Iā€™ve been on both sides of the coin. Iā€™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 itā€™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 Iā€™m holding because my initial holding period was 3-5Y and my underlying views on the company havenā€™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 hopeā€¦ in the end I got out after losing Ā£2,500 of my hard earned money, others stayed in and lost a whole lot moreā€¦

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