If you can't convince yourself "When I'm down 25%, I'm a buyer" and banish forever the fatal thought "When I'm down 25%, I'm a seller," then you'll never make a decent profit in stocks. (Page 246, One Up On Wall Street)
If we are holding stock of a good company and if the price should decline, the logical thing for us to do is to buy more since the stock has become cheaper, especially if there is a good margin of safety.
Why sell?
Remember that Peter Lynch is all about FA and I have no doubt that TA practitioners will be able to explain why selling might be a good idea based on chart action.
Peter Lynch doesn't believe in stop loss, by the way.
I think, as retail investors, we have to take the middle ground.
We probably do not have the financial muscles of a fund manager like Peter Lynch and to do what he advocates, we must always have a war chest ready.
How to have a war chest ready?
Well, we should save as much of our earned income as we could from employment, for a start.
However, this could be painfully slow.
So, we have to be pragmatic and take some money off the table when prices run up significantly once in a while.
We have to grow our war chests ourselves since we cannot get fresh funds from new unit holders like fund managers can.
This way, we would be able to buy even more if prices were to plunge significantly for some strange reasons.
Obviously, there are always two sides to a coin. We could decide to sell and prices could go higher after we have sold.
Prices could also go lower after we have bought more. Well, that is the way Mr. Market is.
He doesn't care what we have done. He will do what he will do.
This is why many people focus their attention on asking what might be or could be happening in future.
They try their best to guess what Mr. Market will do.
Indeed, questions in the form of "Will the price fall/rise in the next month/quarter/year?" are quite common in some quarters.
To me, the important thing to know is "What should I do?" given a certain set of circumstances.
So, what should I do when I'm down 25%, for example?
Related posts:
1. How to be "One Up On Wall Street?"
2. A common piece of advice on saving.
3. When to BUY, HOLD or SELL?
4. Be prepared for war!
5. Risks and rewards: TA and FA.
6. Where did I go wrong?
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11 comments:
Hi, I guess some people are against buying when shares/market is down 25%, because of what GFC have done.
After all, in 2007, say market or the shares have correction of 25%, there are people who invested and buy in, only to find it go down again... and top up.. and go down again.
Just example of Lehman brothers or AIG. Good stocks, but well.. the people who invested when the shares are 25% down.. .are broke.
Hmm, this have me asking: during the financial crisis, when the stocks you own are 25% down, what do you do? Do you wait or in the first place, you have already chosen your stocks carefully and hence, the stocks are worth to be bought.
Any advice? Or in the first place, just select the 'good stocks' and undervalued ones, so it won't happen?
I remember Warren Buffet didnt buy stocks or something in 2007, but I also remembered him having his stocks hammered down abit. But he said, "I am buying." I thought he was just playing the game of 'smart investors' will do.
Looks like I'm wrong (again).
That said, I guess the risks of finishing all the army in the war chests are real, should the price didn't come up again, hence, stopping people from buying.
Sorry for the very beginner post, i guess.
Hi Willie,
Thanks for the very pertinent comments. :)
You might be interested in this earlier blog post:
When to be fully invested in the stock market?
When the bear comes of its cave, none will be spared. However, remember we are talking about stocks. Good companies will continue to do reasonably well and since their stocks would not spared by the bear either, we should buy more of their stocks.
Sounds simple but to act on this could be something else. This blog post is really a reminder for myself. ;p
I have Capitaland and it is already down 32%. I will not cut loss because Capitaland is a good company and is still paying $0.06 to $0.07 dividends per year. Cutting loss means l will get back a much reduced investment capital than originally invested so l will not do it. Will l buy more of it? No. It is because there are many other investment opportunities of higher returns.
Hi Money Honey,
Well, there could come a time when Mr. Market decides to sell the stock of CapitaLand's at a price too compelling to ignore. ;p
To answer I will not sell when price is down 25% is arbitrary. I think what peterlynch means is we should not be affected by distraction of short term price movements, and if we do not have such temperaments of investing thro losses and letting a winner run, we should not touch stock. 25% has no meaning here, if u are buying a cyclical and the indicators are saying we are near the top, u should sell even if u are sitting on a 250% profits. If something fundamental happen and competition is killing your choice punter, it is wise to let go even if u had just a 5% loss, why wait for 25%. For example, if due to high production costs, if a company is not lean enough, if u go sooner than the rest, so u need to know if the company u bought can stay eked a small profits in a tough environment or can survive till the sector consolidates and demand and supply return to equilibrium.
U need to look the company well enough and conduct stress tests, project earnings, then u will know of its a good idea to buy when a company drops even 10% or u should run.
I run when HPHT release its q report, I might be wrong, but my calculations is that they will see lower DPU in second half, contrary to what most research reports say. Even if I am wrong, unless its due to my understanding of existing numbers. So there is no panic in any decisions .
Hi Mike,
I think you have cracked Peter Lynch's statement and also the code in my blog post (i.e. the important thing to know is "What should I do?" given a certain set of circumstances). :D
Of course, your comment has opened up even more questions which are pertinent and are questions which we must ask to understand what I referred to as "circumstances".
I am glad that you have commented. Thank you. :)
Great comments, I see there are 3 broad aspects to guiding buy, hold or sell when ur stock falls by a significant %.
(1) Liquidity - for some reason u need the cash, so sell. Not a market driven decision.
(2) Alternatives - u have found something more compelling and it's worth taking loss on current investment.
(3) Strength of investment thesis - mistakes made like fraud, run. otherwise, if u r a value investor, n u did ur homework; even if it falls by 25% u will say I m right n market is wrong, so I buy more. of coz whether u can afford to buy more depends on (1).
Good post!
Hi HL,
Number 1 can be avoided if we are not using money we cannot afford to lose. This is something that cannot be over emphasised. Use money that we can ill afford to lose and we are giving emotions a chance to influence our decisions.
As for number 2, I really don't know. I guess it is really subjective and it would depend on what we believe in. Perception is, of course, reality.
Number 3, we often hear that Mr. Market is always right. So, saying that we are right and Mr. Market is wrong definitely requires strong conviction. Not many have this in them but many successful investors are contrarians.
Thanks for the comment. :)
AK,
You are now into erotica.
Full nudity is crass.
Always leave something to the imagination ;)
Groovy! (say it like Austin Powers)
Hi SMOL,
I only learn from the best, shifu. I am humbled by your presence. ;p
Aiyoh, simi erotica and nudity. Makes my blog sound so R rated!
Oh, behave! (say it like Austin Powers)
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