How to Survive Small Losses For Big Profits
Every investor at one time in their investing life has been shaken out of an investment for a loss. The investor purchased a stock on Monday and by Friday the stock price had declined. The investor contemplated what to do over the weekend, and when they saw the investment down again the following Monday they sold the investment at a loss. The investor was shaken out of their position because they feared losing money. Months later that investor looks at the stock they sold trading at a price well above where they initially bought it. They think if they had just held on, they would've been up "x" amount of dollars. This has happened to us of all as investors, but it didn't have to. During the decline of the stock price investors start to get emotional and less logical. We as investors forget why we made the investment; and we seem to find everything that points to the market going down even more, even though it isn't.
Surviving small losses is essential to seeing big profits. In order to see those big profits in 2018 and beyond we want to provide a few tips to get through the pull backs so you don't sell earlier than you need to. Hopefully these tips will lead to great returns on your investments.
Understanding What You're Investing in and Why You're Investing in it.
Surviving small losses has a lot to do with knowing why you're invested in a company. No stock goes straight up or down. And if you're investing before the crowd you'll likely see your investment go down before it goes up. If you invested in a company because you believe the company's inventory management and supply chain infrastructure is better than their competitors, then that should be your mark. If the stock price drops after you've invested, as long the company still has that edge with their inventory and supply chain, then there is no need to sell in panic. When you know why you've made the investment, it helps you deal with the pull back in the stock price. When the pull back in the stock isn't due to the fundamentals of the company changing there is no need to sell.
Understanding the Difference Between a Pullback in the Stock and a Market Correction.
In 2017 Apple (AAPL) had two major pull backs, one from a high of $156 to $142 and another from $164 to $149. The first pull back occurred during early June 2017. Google (GOOGL), Facebook (FB), Netflix (NFLX), and Microsoft (MSFT) had also experienced pull backs around the same time in June. These pullbacks effected the NASDAQ Composite Index causing it go down during that same time. Seeing an investment purchased at $156 drop to $142 isn't fun for any investor, but you have to look at the overall market before you panic. The S&P 500 didn't take the same dip as Apple, Google, and FB at the same time in June 2017, and neither did the Dow Jones Industrial Average. The sky wasn't falling in June 2017 on tech companies although it might have appeared so. Before panicking and selling your investment for a loss because it's down slightly analyze the entire market, and see what other stocks and indices are doing.
Block Out the Noise and Follow the Money
CNBC and Bloomberg are for entertainment purposes only. When these outlets broadcast news about a company's stock price, and that news causes the company's stock to increase or decline in price this should not be your sign to buy or sell, specifically when a stock goes down. You have to follow the smart money. A good example of this in 2017 was Nike (NKE). The stock was beaten down in the news and in the press during the summer of 2017. People pointed out inventory issues and increased competition from Adidas and several other reasons why Nike was no longer a good investment. However, every time Nike fell below $52 on a negative report or negative article in 2017, the smart money would buy it up. Their was a lot of noise about Nike and why it wasn't a good investment, but the smart money saw it differently and continued to accumulate shares in the low $50s. Something to remember is that smart money buys low and sells high, dumb money does the opposite. Follow the smart money and ignore the noise.
Invest With Your Head and Not Over it
As stated earlier, stocks don't go straight up or straight down, and if you're investing before the herd, the investment is likely to decrease in value before it increases in value. Many investors sell an investment too early because they are down and they can't stomach seeing their investment decline. After they've sold their stock at a loss, the stock settles and then goes back up and the investor is questioning why they sold. Many times this boils down to the investor investing over their head. The investor is investing money they can't afford to lose and they've invest it all hoping for the investment to increase in price immediately.
To get past small declines you must invest with your head and not over it. You as an investor are going to have losing investments if you invest over a long period of time. And many of your investment winners will have down days, down weeks, and at times down months before they take off and do what you expect them to do. Using our Apple (AAPL) example from above, if you purchased Apple's stock in June of 2017 at $156 and sold it at $142, you would be missing out on profits now as Apple's stock reached a price of $175 per share and seems poised to break $200 per share in 2018. That 14 point decline in Apple's stock in June 2017 meant a $14 decline in account equity for investors that owned one share, $1,400 decline in account equity for investors with a 100 shares of Apple, and a $14,000 decline in account equity for an investor with 1000 shares of Apple. As an investor you will only survive these declines if you're investing money you can afford to lose. A decline of $1,400 may not mean much to the investor with $750K in their investment account, but it could mean the world to someone with $155K or less in their investment account. You have to invest an amount of money that you feel comfortable losing. By doing this you will be able to assess pull backs in the market more logically than emotionally.
Loses and declines are a part of investing. No investment, whether it's stock, bonds, commodities, real estate, or cryptocurrencies goes straight up in price. There will be some down times and some periods where the investment doesn't gain or lose value. To get through the declines an investor needs to remind themselves why they purchased the investment. An investor should analyze the overall market when their investment is down, they shouldn't panic sell if the overall market doesn't warrant a sell. To see substantial investment profits an investor also has to block out the noise and watch the smart money. Pay less attention to what the news outlets are saying and more attention to who is buying and who is selling. Lastly invest with your head and not over it. Invest what you can afford to lose and not a penny more.
Remember investing is a marathon, a good investor is always thinking about the long term. Good investors don't allow the day-to-day fluctuations of the market to shake them out of a good investment. One morning in 2018 when you check your investments and you see that you're losing money on an investment, before you sell in panic remember the tips above.These tips could help you gain a potentially huge profit.
May your next investment be your best investment.