|
I was talking to a client at the recent Trading Tactics on Sunday 14 September. He was hurting as his portfolio had lost a significant amount over the last nine months. He asked me what he should do. As it is not appropriate to give specific advice I turned the question back to him. He was contemplating two alternatives. He was considering selling as he did not want to lose any more. However, selling would mean actualising his losses so he really did not want to sell. His argument was: “I will be selling at the bottom.” He was asking a question, but he really wanted me to confirm his already formed opinion.
When I asked if his portfolio could lose more, he said that it could but he believed it wouldn’t. Did he really believe it wouldn’t or hoped it wouldn’t? I asked him another question. How would he feel if his portfolio halved in value from where it is now? His face reflected his pain. He then rejected the idea: “No, it can’t happen.” My suggestion was for him to create a plan, either on his own or with the aid of a qualified advisor, and then stick with it. I doubt if he did (or will).
We say in all of our seminars: you must protect your capital, your portfolio, and your profits. The only way to do that is to use stops. Whether your stops are based on Daily, Weekly, Monthly Swing charts or a percentage of the current value is important. But what is more important is to “have a stop”. It may sound blunt: “Hoping is not an exit strategy”. I wonder what this client is experiencing as the markets tumbled after the Lehman Brothers collapse, two days after the conversation we had. When will the down move end? How far can the market fall? It can fall much more. Look at Babcock and Brown: from $34.78 high in 19 June 2007, to the low of $0.79 on 16 September 2008.
Another mistake this client made was not listening to an answer. Why? He did not like the answer. He was not after an answer, he was after a confirmation of the opinion he already had. My guess is he might have even asked several others waiting for an agreement.
We all make mistakes. What is important is to learn from our mistakes and the mistakes of others. What can we learn from this story?
- Have a plan
- Use stops to protect your capital, portfolio and profits.
- If you want advice, be open-minded.
We still have interesting times ahead. Your thoughts, beliefs, feelings and emotions will shape your bottom line as much as your technical analysis.
Believe, achieve
Sinan Koray
|