How to Get Rid of Losers : In This Article we will learn Investors How to get ride of loss the money in stock market, there are lots of reason behind loss of money in market, some important reason today discuses in this post so read carefully.
So, what’s the biggest obstacle to successful investing there’s one answer to that question it’s you now it’s not your fault when you were wandering the Savannah several thousand years ago probably not you more let your ancestors all right you were hardwired with emotional responses designed to ensure that you ate rather than becoming the next larger things next meal all right.
Those emotions still run rampant in most investors brains sadly investing isn’t about emotion to be a great investor you need to be cold rational logical so, in this post we’re going to take a look at one of the classic mistakes emotional humanoids make their own expense and that is hanging on to the losers all right why do we hang on to losers and how can we stop doing it because it’s a bad idea alright.
Now first off where’s the evidence all right well chat called Terrence Oh Dean at Berkeley in the u.s. he’s a professor there he did a study a few years ago now and came to the conclusion that we are 50% more likely to sell a winning stock than a losing stock.
So again with 50% more likely on average to sell a winning stock but a losing stock in other words we love to bank profits we hate to recognize losses okay he also worked out on average mutual fund managers who don’t dump losers cling onto them okay on average under perform their peers who are more sanguine about it by 4% a year.
All right so there’s statistical evidence out there but we hate to dump losers so in this Post MoneyPip going to take a look at why that is because understanding why it is might help you to actually do what you should be doing with your stock portfolio. Look at the impact of it and look at how you can kind of force yourself into being a bit more rigorous and not hanging on to stocks that frankly should have been cleaned out of your portfolio a long time ago right why is it okay that we are so keen to hang on to our losers just get rid of them alright.
Three Biggest Reasons to Rid of Losers Money
(How to Get Rid of Losers)
- Overconfidence – (How to Get Rid of Losers)
- Confirmation bias – (How to Get Rid of Losers)
- Anchoring – (How to Get Rid of Losers)
Three reasons there are more than three but these are three of the biggies okay…..Here are three emotional defects if you like hardwired into most investors. one overconfidence – we all suffer from what’s called confirmation bias big words going to explain them all in a moment and three okay we all also are prone to something called anchoring and all three of these four reasons why we seem unable sometimes to get rid of stocks that frankly are acting as the drag on our portfolio overconfidence let’s face it this is not a difficult one to sell okay.
We all think we are above average drivers especially if you’re a bloke we all think we’re going to live longer than average why wouldn’t you we all think we can drink more than the bloke standing next to us at the pub bar.
All right and we all think we’re better at investing the next map because the law of averages says we can all be better than average but we all think we are.
Overconfidence (How to Get Rid of Losers)
Now there’s a reason for that overconfidence that going into the detail this isn’t a psychology course but overconfidence helped okay when you’re out in the wilds on the Savannah on the open plain they go over confident. They are being confident tended to mean you attracted a bigger group to you you became the group leader more naturally.
It translates into the current workplace better jobs bigger pay rises and even more dates alright so, there is a reason why overconfidence pays off in the real world it’s hardwired into us some extent there’s an investor it presents a bit of a problem. Because it leads us to believe that we haven’t made a mistake okay.
We just haven’t made a mistake that’s share that’s collapsed in price we bought your stay will come back eventually will come back because we haven’t made a mistake we don’t make mistakes with better than average investors. So we’ll hang on in there okay and you know buy-and-hold as a strategy is fine. But it shouldn’t be a kind of death grip I mean okay so overconfidence it’s a problem it’s a natural built-in feature of humanoids if you like it’s a problem that investors need to recognize and in a moment we’ll see if we can sort of do something about it mitigate it take it away.Again become those rational unemotional investing machines almost that will actually make the most money.
Confirmation(How to Get Rid of Losers)
Second problem confirmation bias once we’ve made a mistake we look for evidence that we haven’t okay give me an example. okay the housing market okay housing market can be split into two groups there are those who have properties if you like I’m warmth probably prices keep on rising. okay so when they read the newspapers they’re always on the lookout subconsciously even if they don’t know it for stories that confirm property prices are going to rise as a shortage of properties etc. etc all right
and equally there’s a group of people who think there’s a massive crash going to happen may have thought that a few years ago that sitting on the sidelines that got cash all right. They’ll look for all the evidence they can find that property prices are falling and both groups will tend to ignore the facts in order to substantiate their belief in other words they have a confirmation bias they’ve chosen a position and by golly they’re going to make sure that the facts stack up with that position.
And in investing terms it can mean you Scrabble around the whole time going no no no no though there are perfectly good reasons why I bought an investment the early standards now looks to be tough. okay and all I need to do is find those reasons and you justify hanging on hanging on hanging on and hanging on.
Anchoring(How to Get Rid of Losers)
Number Three anchoring now psychologists have written many many papers on anchoring again it’s hardwired into human brains yours and mine it’s the idea that offer somebody a figure and they will instantly grasp onto it okay.
Even if it’s irrelevant to the decision they’re about to make okay go back to property okay very few people challenge the asking price on a property and actually very few properties achieve the asking price. Usually is quite a big gap but estate agents know that just by having an asking price even an unrealistic one people will start to my their expectations about what the problem is worth upwards.
And studies have shown that if you set the initial price in any negotiation low the two parties will tend to merge towards it set it high those are the opposite which is why by the way great advice in any negotiation is if you think the other sides open with a dark number walk away from the table.
don’t even be tempted as your little subconscious brain might be yeah well maybe the numbers not so unreasonable after all maybe I should join in this negotiation right better to walk away because otherwise anchoring might just start to creep in there and take hold.
Now as a stock investor what does always mean people get anchored to the price they paid they go well I paid four pounds a share I’m not selling until I get four pounds a share minimum. But four pounds a share last week might be totally irrelevant if the facts have changed the share price may never get back to four pounds a share.
I was guilt I’ve been guilty in the past of buying shares they’ve just continued heading south and I’ve done it myself so well if I at least get back to break-even yeah then I’ll sell and I’ll be happy it’s not going to happen. I’m anchored on a number that’s just now completely irrelevant people do it with property that it shares that it with all kinds of things in practice.
So, those are three reasons why if you like we almost can’t help in some respects hanging on to losing stocks probably the longer than we should but help is at hand.
okay how can we take away some of these emotions how can we make stock selling and the reason I pick selling in this Post is because there’s no awful lot of stuff out there about buying stocks when to buy how to buy yeah but little less on selling and selling matters because if you leave your money in a Duff stock.
There’s an opportunity cost people think don’t cost me anything I’m just wait so what happens will it does because that money could be invested somewhere else and be earning a better return so you are losing out by leaving your money sat in under boring stocks.
So what are we going to do about it one mechanical option is a stop loss. there are drawbacks to stop losses but what are they a stop loss is simply this idea it’s the idea that you buy a share at say I know three pounds you ask your broker for a stop-loss of let’s say 10%.
What that means is having bought if the share price falls 10 percent or more you should be kicked out of the position to minimize your overall Lots so you’re buying a 3 pounds the 10% stop loss level that suggests it could drop around 30 P so you expect to be kicked out of the trade at 2 pound 70. if nothing else that will force you out of a losing position.
How do you pick 10% well that’s an interesting question all right and the problem with mechanical stop losses is that there’s two things.
- May be kicked too early out of a trade with it’s been a bit of Volatility and actually there’s a rising underlying trend
- The Standard Stop-Loss
One you may be kicked too early out of a trade with it’s been a bit of volatility and actually there’s a rising underlying trend and Secondly the standard stop-loss. You don’t get the opportunity sometimes to actually bank gains no I mean by that well there is another type of stop-loss available to some brokers I’m certain through some electronic trading platforms called a trailing stop loss.
Now this could also be set at 10% what happens is the the stop loss level follows the share hopefully upwards okay so for example if you were to buy a share at 3 pounds and the stop loss you set at 10 percents you’ll be kicked out of 2 pounds 70 right and then the share climbs to 3 pounds 50 suddenly the stop loss moves up to 90 percent of that price.
Okay so the stop loss now kicks in 35 pence below the new 3 pound 50 level or at 3 pound 15 what that means is you can lock in 15 pence of gains even if the stock subtly Falls. Whereas the plain vanilla stop loss you might because it won’t kick in until you get back to the original level you set the stop loss at which if that was 2 pound 70 well that’s where the stop loss kicks in.
So, the advantage of a trailing stop loss is it actually follows a share up and then kicks in to at least preserve some of the games any subsequent collapses okay so that’s kind of a mechanical way you can protect yourself from not selling because a stop loss will sell for you right yeah you know if you even from the 2 by the time or asleep a stop loss can activate and dump shares that perhaps you need to get rid.
However not for everybody so what else can you do by other options think about why you bought and wrote it down not a lot of people buy and then forget. And they can’t remember weeks or months later what their criteria for buying were and hopefully they had some logical criteria they looked at ratios I deal with those in other Post they look for low p/e ratios or low price to book high Dividend Yields they have some reasons good management team unique product unique license unique place in the market there were reasons why they bought. Write those down at the time you buy the shares and review them alright and if the facts have changed you need to change with them.
Okay so some of those unique buying points if I can call it that don’t exist anymore, then maybe it’s time to think about selling right so I call that sort of an active you know monitoring strategy with your portfolio rather than just buying the getting and going on to the next purchase investors do that they like to buy things and they forget sometimes that in order to take our profits eventually you’re gonna have to ultimately liquidate as well.
Final tips ask yourself this question if the stocks dropped ask yourself the question would I buy it at today’s price bar starting scratch already own it’s too late but would I buy it today’s price.
And if the answer’s no what are you doing hanging on to it maybe it is time to think about selling it because if you wouldn’t buy now what were you thinking of buying even higher price a few weeks months or even years ago.
So, that’s another test now if you want to know more about some of these investing psychology themes but they’ll cover them very quickly overconfidence confirmation bias and anchoring then do have a read of one or two of the the books produced by Nobel prize-winning psychologist Daniel Penman that’s a very good place to start.
And on stop losses and trailing stop losses and the criteria for buying shares in the first place do have a look at one or two of my other post that deal with those themes the message in this one is very very simple we’re prone to spend all our time worrying about when to buy not a lot I’m thinking about when we sell that’s a mistake especially since we’re hardwired to avoid selling and recognizing sometimes that we need to that can cost you money over the long term as an investment you.
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