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Psychological and Emotional
Treatment in Investment Loss
“Andrew,
when we have losses, and the stock price level reached is already
at
1998 low support line, do we wait for reversal , knowing that the KLCI
is
unlikely to outperform in the longer run? Or do you consider averaging
down
at that particular level? Usually what % of stop loss do you put on your
investments?”
One
of my students in our QuaSyLaTic Investment
System training asked the above question.
In
the QuaSyLaTic Investment System training, I not only teach TA (Technical Analysis) tools and application,
more importantly I coach on the psychology and EQ (Emotional Quotient) of
the learning investors. The later is more important and critical to
master, at the same time we use TA disciplined application to help to
condition our mindsets on Emotional Neutrality.
The
question posed is common to most investors. I share my views with this
global community for the following purposes :
-
To
help you to identify your mental & psychological makeup that could
be detrimental to your investment
-
Hope
you realize that investment is a discipline and serious learning.
Unless you are prepared to put in learning effort, or engage a
professional in such approach, it is better to just keep your money in
the bank and earn the small interest.
I
rephrase the questions to
-
What
should one do if his or her earlier investment is a loss in today
market?
-
Is
it wise to buy some more same stock and average down the losses?
-
What
should be the stop loss level or percentage of stop loss? (this will
be addressed in the next article.)
Background
I
give a bit more background to the above loss scenario.
The
investor purchased a stock some time ago (years) and today it is a loss.
(It can be big loss or small loss. What does it matter - a loss is a loss,
big or small).
With
today limited study on Technical Analysis, current price seems to be at
the bottom, well supported and in line with earlier years of such low
price. This implies that the stock may rebound or go up in time, but not
sure when : days, weeks, months or years later?
What
should one do now? Hold on some more, sell, or buy some more to average
down the loss?
Sound
familiar to most of you!
I
will make detailed analysis of your psychological, mental and emotional
make up when you pose such questions so that you can see your inner self
better and from there you could make wiser decision – to protect your
capital and make real good money, or take action based on worthy human
values.
Do
you admit you make a mistake, whole heartedly?
Most
will say, “Yeah, no need for you to remind me that, Isn’t my today
loss enough a lesson? Sure I made a mistake!”. But if real admission of
mistake is to take action to improve the situation and not repeat the
mistake, then most will have difficulties on that. I will try to explore
scenarios to help you to identify your commitment to learning (from
mistake).
If
you admit you make a mistake before, why don’t you sell off the stock,
end the misery all these years?
“Don’t
bother. The loss already occurs, I consider it a write off.”
If
it is a write-off, can I suggest you sell off and fetch whatever maybe the
little money left and give it to the poor people? (Assuming I give a
deserving case of poverty of a real person in your neighborhood)
If
the person responded “Yes, tomorrow I sell off the stock and give the
money to this poor fellow as I was touched by the sorrow of his plight.”
The action is taken, the investment chapter is closed. A good deed is
done. Very Good.
Another
generous investor may say, “The marked has eroded most of the value
of my stock and is now worth less than $ 500. I will just give $ 500,
from my own pocket, to his poor fellow and keep the “write-off”
stock.”
This
is different behavior, which needs more investigation of the psychological
and emotional state of mind. Challenge him or her : then sell off that
write off and give 2 x $ 500 to the poor.
Basically,
the investor has lingering and faint hope that the stock may one day perform
miracle. Who knows? It may fetch $ 5000, more than the
investment cost! This is on the notion of probability and chance. This is
gambling attitude which most people use, unconsciously.
Then,
why don’t you sell off the write off, with $ 500 you can buy a lot of
lottery tickets and you may strike a million, not just $ 5000? It is the
same thing, probability and chance.
Now
the investor has problem to face such challenge and will start to give
rationalization. “You know, I never gamble on lottery. This stock is
different now, the new Technical Analysis study indicates a bottom, it has
good chance to go up. Or, there is better business performance of this
stock company as reported in the newspaper. The stock price will one day
go up.”
If
that person is honest with himself, or herself, he or she will recognize
such behavior and rationalization in the past many years holding the
losses and only saw it went down further, if reminded of such loss.
Now
another scenario.
Why
don’t you sell off all your so called write-off stocks and with the
reduced money, buy investment books to study more, or engage a tutor to
coach you on investment?
“Books
are just ideal textbook theories. In real world, things work differently.
There is no need to read investment books.” Or “Market is uncertain
and random. There is no guru. Nobody can teach no-one to make money.”
If that is the mindset and conclusion, it speaks well the investor’s
behavior – investment is dependent on luck, and he continues to try his
luck like a gambler, hold on to his losses and hope for a good day, just
like a gambler is always hopeful of a big win one day.
Why
don’t you sell off all your so called write-off and with the reduced
money, put it in the bank fixed deposit (which still gives you 2.5% return
positively), or another less volatile investment instrument that may give
you fairly consistent 8-12% return?
“Look
here. I am an investor and a sophisticated investor. I am not like those
passive, no-risk-taking guy just putting money in the bank.”
Obviously,
the ego is playing at its maximum level when you hear such reaction. But
investment is Emotional Neutrality, no room for personal pride or
ego!
At
this juncture, the investor should courageously examine whether he or she
has emotional attachment to this particular loss-stock and loss-situation.
-
Do
you have the attached belief or opinion of this particular stock
company? (e.g. it is a good company, no reason why it should not
perform?)
-
Do
you have the attached belief or opinion that your original reasons or
opinion when you did the investment was not wrong, it is the market
behavior, sometime bullish, other time bearish. I am familiar with
this company business and industry, I know what I am doing.
-
Are
you sure it is not your ego or pride that drive your current behavior,
and you use all other logic to hide this fact?
In
all the above cases, you have emotional attachment :
to your opinions on the company, to your investment rationale and
to your ego and pride, which actually means that you did not admit your
make a mistake. The fault is somewhere else, the market, the poor
management of the stock company at that time, whatever.
Self
denial is a major problem to investors (hence they continue to lose
money).
Justification
that it is a small investment, a write-off, is a slow and steady way to
numb your nerve and senses to continue with more small loss and small
write-off of many more investments, eventually a big loser.
While
I teach Technical Analysis tools application in the
QuaSyLaTic Investment System training , I coach on Emotional Neutrality (no emotional
attachment, to opinions, ego or stock). Without such discipline, no expert
knowledge on TA can help one to become good and successful investor.
If
you have the discipline and attitude to protect even RM 1 of your money,
without the language of write-off, you have better chance to make money
and later make million and protect that million also. Obviously if you do
not have the same mental discipline to protect the RM 1, you cannot never
learn.
Do
I buy more stock to average down the loss?
The
mindsets behind the above question are still very much the same
psychological, mental and emotional make up as described above. This is a
sure way to lose more money (even if this one, by chance, you strike it
right.). This is because the fundamental premise of the thought is a
recipe for failure. You are still having the emotional attachments.
How
does one then overcome such flawed thinking?
Take
the following test.
Based
on whatever your homework tells you (whether you use TA or fundamental
approach) or insider’s information, or some expert opinions you
subscribe that it is a good timing to invest in this stock, will you
invest, say, 90% of all your saving in this stock today?
If
your answer is YES, (of course you need to have the strategy of stop-loss
whether for small or big investment, which I teach in my
QuaSyLaTic Investment System training ), then it implies that you have done a good homework with
high degree of success in this investment. Then it is not a question of
buy a few more stock shares to average down the loss. It is a case of good
homework, there is very good chance of making profit, as long as I also
have stop-loss if the market proves me wrong.
This
is a totally different mental, psychological and emotional preparedness
for a new investment, irrespective of whether I had invested before, with
loss or not. Then don’t just buy a few more shares of the same stock,
buy more.
If
not, you are still not sure, then you should not even buy a single share
of that stock, you should sell off all the existing shares, even with a
big loss. Because you fear
your losses. especially you still do not have the knowledge and skills
to craft a investment plan with good strategies : to protect your capital,
fear your loss and let your profit run.
When
you are not sure, you should not gamble. You should invest only when you
are sure with reasonable target of a good profit in the realizable
timeframe and strategies to stop loss.
Remember
I said, are you ready to invest heavily TODAY? If you say, maybe the stock
price will go up in a near future, or good chance it will go up, then you
are still unsure, you are still playing with probability and chance on
timing. Your existing invested stocks and new investment are still subject
to uncertainty with no calculated risk / reward ratio to be monitored and
controlled. This is suicidal investment approach.
All
investments face uncertainty, but a good plan for realistic market gain
with calculated risk / reward ratio and stop loss discipline remove a
large part of the uncertainty for a more winning game.
Hence
if your attitude is to invest a bit more to average down the loss, (after
all, it is a small amount, which can be written off later) you behavior
and mental make=up are no difference from existing investment failure.
Such repeated behavior guarantees you to be bigger investment loser.
If
you are uncertain about your homework in investment. CUT OFF all the
existing loss, start with a clean sheet of paper, start LEARNING
seriously until you are ready.
Will
you let your teenage under-age child drive your car in a busy highway when
he has no training in driving, no driving license? Do you still give him
the car key and car when he has injured someone on the roads? It is absurd
for parents to do such thing, isn’t it?
Then,
why you continue to invest to average down loss when earlier activities
prove that you are a loser?
One
Scenario I keep my earlier Loss
If
today stock shows sign of small gain compared with yesterday or last week
price, with clear evidence that it is on uptrend, though may not be in
great speed and momentum, then I apply “let
your profit run” principle.
But
the mindset is that I ignore or detach my earlier experience in this stock
(which is a net loss). I must maintain my emotional neutrality and treat it
as if this is my today fresh investment. I should never let my loss as a
criteria or condition or reference to determine when I should sell to get
even or recover my loss. This is because the market does not give a damn
about my previous experience, gain or loss. The market will move in the
direction it chooses to.
I
need to apply my TA skills and discipline to watch out for cut loss level,
to protect my present shrunken capital and let the little new profit run
and fear any new loss.
This
will bring us to our next discussion : What
should be the stop loss level or percentage of stop loss?
End.
If you are interested in the above described mental, psychological and emotional preparedness in investment, you are welcome to join
QuaSyLaTic Investment System training as Technical Analysis gives the language and tools to help Emotional Neutrality.
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