One of the easiest traps for new investors to fall into is to buy a stock on “hype” at a peak, watch their investment quickly go from green to red, panic, sell at a low after losing a lot only to watch the stock then rebound to loftier heights than ever. If you’ve invested at all you’ve undoubtedly been through the same. It’s what happens to people unfamiliar, uneducated, or unpracticed in actual investing. You could be following the charts for months ahead of time; what’s missing from this equation is foresight, and, in a way, hindsight. If we all could go back and un-do the mistakes we’ve done…well the world would be a pretty boring place.
Regardless, it’s a trap we all fall into; one of the worst things you can do is to dwell on this loss and lose your sight for new, different, better money making opportunities. Take it from one who has lost himself and hear me when I say: dwelling on lost money will only make you crazy, angry, and is a waste of time. Take this free investment advice with you to your therapist or tavern or wherever else you go to drown your sorrows and relieve stress.
Don’t Dwell On Closed Trades: Once a trade is done, it’s done. Don’t dwell on it. If you got out of a stock right before a huge rebound, it’s good to look at the technicals (if you dabble in technicals) – an even more practical solution for layperson traders is to look at the news. I’ll never forget one of my biggest blunder trades from 2009 was buying into an auto parts maker stock. I bought in on some word I’d heard (which ended up being correct in the long run) and I bought in near the highs of a peak. In fact, where I bought that stock was the highest recorded trade that day; and that week; and that month. This stock not only lost money, it retraced 50%! This was huge for me because it was a fair amount of money. If I’d have had the foresight to read between the lines of the news of the day: “CEO of Chrysler Takes Lear Jet to Congress”= “The American Auto Industry Isn’t Going Anywhere;” things might have been different. But of course I only saw the red ticker tape, so after losing more than 50% of my money, I sold out. Of course later that same month “Cash for Clunkers,” was announced, the Auto Industry is fine, everyone drives, there’s love in the air, and this stock touched 100% + from where I’d bought it! Not only was I out the money I’d lost, I was also out all those gains which would have been mine if I’d have just held out a little longer.
If you’re stressed out about losses, do yourself a favor and pull out your individual stock’s chart. Most charts are just on a daily or weekly trend; but pull it back a little longer; six months, 3 years, 10 years. For most stocks you’ll see movement which goes up and down. Heck even Google went from $84 up over $700 at the end of 2007 back down below $300 at the end of 2008 back up to near $600 currently. So stocks go up and down; even the fundamentally strong stocks. Google is an extreme example but have a look at your stocks chart and see what’s going on; is this a fundamental shift in your company’s business model? Are institutional investors getting in at these lows or getting out? Is there some news that could be affecting the stock’s price? Of course there was no way for me to know about “Cash for Clunkers” before it was announced but the fundamental thing I should have seen about this auto parts maker was that the American auto industry isn’t going anywhere anytime soon.
It can be easy to dwell on stock losses; even easier to cut and run the other way. One thing wise investors will do is invest with a cool head, realize that stocks go up and down, only invest what you can afford to lose, and realize that, in the end, most investors will come out ahead on a long enough time frame.