Is Cut-Loss a big No-No for Investors?
Thursday, January 19, 2006
As an investor, I reckon that it just does not make sense at all not to accept this cut loss theory.
Why should one cut loss?
Face the reality, on the average (let me stress the word 'average'), most companies in this region does not really have a true sustainable competitive advantage that allows the company to grow at a healthy pace for a long period (let me stress the term 'long period').
Hence, what we will have is companies having shorter period of fantastic wealth (ah.. how do i define shorter? 3 years? 5 years?). Sometimes this is the cyclical nature of the business or sometimes there is changes made either in the economics of that specfic industry or perhaps there is dramatic changes made in the companies management that might cause an end to a companies competitive advantage.
Simply put, we are more likely to see scenerios where good companies turning bad and also on occassion bad companies having a temporary bout of 'good' fortune.
Back to investing...
Now if and when an investor purchased shares in a listed stock, the possibility exists that the so-called persumed good business could turn bad.
Hence a simple commonsense question:
So if the company turns bad.. does it make commonsense for the investor to hang on to the share and hope the company have a change of fortune again?
Ahh.. it is always possible for that to happen but in the meantime just imagine what would happen to the share price while one is waiting for the companies fortunes to change?
Take a semi-conductor stock Malaysian Pacific Industry. (ah.. now it is much acceptable fact that chipmakers business is very much cyclical) During its peak, it earned some rm200 million (fy 2001) and a peak price of around rm57.00 in 2000. Back then, everyone was simply going goo-goo-ga-ga over chip stocks and hailing the bright investing prospects in the industry.
Now? 5 years later, current earnings is only some rm43 million. The stock price is only some rm10.00+-.
So if one had bought and HELD tigh-tight as per the Myth of Long Term Investing, then the end-result has simply been devastating. As some would call it as perhaps Value Destruction?
Hence, does it make sense to cut-loss once the companies earnings started to go bad?
And the second most important point is we are but normal buggers who are more likely to make investment mistakes.
Yes, I say it again... simple poor stock selection mistakes can be made by any of us.
And what does one do when one make a mistake?
Don't we want to rectify it?
And isn't the best way to rectify it is by stop being wrong.
And in investing, admit the mistake and accepting the mistakes made, sell and move on.
Holding on and hoping that a market bull will help us correct our investment mistakes isn't investing anymore, isn't it? Make sense onot?
So do you think that ze Cut-loss a big No-No for investors?
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