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Post by enigma on Aug 29, 2016 19:42:59 GMT -5
If it's intuition or educated guessing, there's no problemo, but if it's a need to mitigate feeling foolish, there's a problem, and that's what "locking in gains" is all about. As Tenka would say, if it's not a viable strategy then it's not a viable strategy. Selling to mitigate risk is about as rational a choice as it gets when you're in the money, but you can always re-characterize that as worry about feeling foolish for having lost the chance in the future. I'm not talking about selling to mitigate risk or to keep from feeling foolish in the future. I'm talking about selling on a momentary high and buying back on a momentary low repeatedly in an attempt to adjust the cost basis of a stock that you lost big on, but not as a strategy to be used on that same stock if you don't own it. That's the scenario ZD is talking about, right? |
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Post by laughter on Aug 30, 2016 0:06:41 GMT -5
Selling to mitigate risk is about as rational a choice as it gets when you're in the money, but you can always re-characterize that as worry about feeling foolish for having lost the chance in the future. I'm not talking about selling to mitigate risk or to keep from feeling foolish in the future. I'm talking about selling on a momentary high and buying back on a momentary low repeatedly in an attempt to adjust the cost basis of a stock that you lost big on, but not as a strategy to be used on that same stock if you don't own it. That's the scenario ZD is talking about, right? Bear in mind that it's a strategy you might use for a stock that you've got a gain on as well, selling at local peaks, and buying back to lower your cost basis. If you do it successfully you don't have to wait for the price to double to be playing it 100% safe with the position. The bottom line is that it always comes down to the same uncertainty. You're not certain that you're at the bottom in the scenario that began the discussion, but you're sure enough that you think buying back is a low risk. It only pays off if the stock is volatile, and not all volatile stocks are bad investments in the long term. |
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Post by jay17 on Aug 30, 2016 8:20:10 GMT -5
Haha this will take some time: Ha, yep, i quite agree. Especially since i appreciate and enjoyed my first read of your response. Will post asap... |
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Post by zendancer on Aug 30, 2016 8:29:34 GMT -5
Haha. You can't spend an unrealized gain; only a realized gain yields spendable money. The reason value investors sell out their positions when a stock reaches or exceeds their target price is to lock in the gains. They don't do that to avoid feeling foolish; they do it because the stock met their expectations based on their initial analysis of the underlying fundamentals. It's like stacking the odds in your favor. If you don't take advantage of a sale, then you don't lock in the savings. Similarly, if you don't lock in a big gain when it's offered, the gain may disappear. Sometimes, for example, a stock will suddenly rise or fall very rapidly for no obvious reason. It's usually because some big institution is entering or exiting a position in the stock and is purchasing or selling millions of shares. This causes a short-term spike upwards or downwards in the price. When this happens, he who hesitates often misses a big opportunity. It's wise to check the news when this sort of thing happens, which may take 30 seconds. If there is no news, then immediately hitting the buy or sell button can often capture an immediate gain or help set up a longer-term gain. Then you're saying it IS a viable strategy. So why wouldn't an investor buy in to a rebounding stock and apply that strategy? BTW, I wasn't suggesting that selling stock and realizing gains was done to keep from looking foolish. It would be pretty foolish not to. What I'm saying is that if snigling is done in response to an investment that has dropped severely and is rebounding, and is not done as an investment strategy that applies to any rebounding stock that you don't own, it's being done in order to recover emotionally. It would be a strategy not normally employed, but used in this case to make one feel better. Am I making sense? The strategy I described is not about trying to feel better. It's simply a viable way to get out a stock that appears to be a long-term loser. The goal is to get out of the stock with the least loss possible, and it's a much riskier approach than using the same strategy with a stock that appears to be a long-term winner. With a winner, you can use the same strategy in an effort to both multiply the gains, and also to lock in gains along the way. With a loser you're just trying to get out. When I back-tested the strategy with winners, trading the oscillations increased overall gains about 4%, but in some rare cases (such as HIMX) gains were huge. When HIMX ran from about $6/share to $14/share, I traded the oscillations continually, and sequentially locked in gains up to $11, where I finally exited. Later, I bought the stock back at about $6 or $7. A buy and hold investor over that same period of time (about six months if I remember correctly) would have had no gain whatsoever. On long-term losers, however, I've only been able to exit with total success a few times, but at least the losses on the losers were mitigated to some extent by using the same strategy. I write about making money, saving money, and investing money so that money can go to work, take on a life of its own, and leave people free to pursue their other interests. I picture wealth creation as similar to forming a snowball that will roll downhill indefinitely increasing in both size and speed. Similar to the pathless path that leads to existential understanding, the path to financial freedom requires freedom from culturally-indoctrinated ideas, a willingness to leave the crowd behind, and significant changes in behavior. From what I've seen, very few people are seriously interested in either path. In the words of Byron Katie, "That's just the way of it." LOL |
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Post by enigma on Aug 30, 2016 9:45:30 GMT -5
I'm not talking about selling to mitigate risk or to keep from feeling foolish in the future. I'm talking about selling on a momentary high and buying back on a momentary low repeatedly in an attempt to adjust the cost basis of a stock that you lost big on, but not as a strategy to be used on that same stock if you don't own it. That's the scenario ZD is talking about, right? Bear in mind that it's a strategy you might use for a stock that you've got a gain on as well, selling at local peaks, and buying back to lower your cost basis. If you do it successfully you don't have to wait for the price to double to be playing it 100% safe with the position. The bottom line is that it always comes down to the same uncertainty. You're not certain that you're at the bottom in the scenario that began the discussion, but you're sure enough that you think buying back is a low risk. It only pays off if the stock is volatile, and not all volatile stocks are bad investments in the long term. ZD stated that the stock in the scenario in question would not be purchased and sniggled by an uninvested investor. (You may not agree) That tells me that the strategy being employed by the one facing a loss is not viable. Hencely, I'm trying to turn attention to why he's using a strategy that is not viable in that case. |
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Post by enigma on Aug 30, 2016 9:57:10 GMT -5
Then you're saying it IS a viable strategy. So why wouldn't an investor buy in to a rebounding stock and apply that strategy? BTW, I wasn't suggesting that selling stock and realizing gains was done to keep from looking foolish. It would be pretty foolish not to. What I'm saying is that if snigling is done in response to an investment that has dropped severely and is rebounding, and is not done as an investment strategy that applies to any rebounding stock that you don't own, it's being done in order to recover emotionally. It would be a strategy not normally employed, but used in this case to make one feel better. Am I making sense? The strategy I described is not about trying to feel better. It's simply a viable way to get out a stock that appears to be a long-term loser. The goal is to get out of the stock with the least loss possible, and it's a much riskier approach than using the same strategy with a stock that appears to be a long-term winner. With a winner, you can use the same strategy in an effort to both multiply the gains, and also to lock in gains along the way. With a loser you're just trying to get out. When I back-tested the strategy with winners, trading the oscillations increased overall gains about 4%, but in some rare cases (such as HIMX) gains were huge. When HIMX ran from about $6/share to $14/share, I traded the oscillations continually, and sequentially locked in gains up to $11, where I finally exited. Later, I bought the stock back at about $6 or $7. A buy and hold investor over that same period of time (about six months if I remember correctly) would have had no gain whatsoever. On long-term losers, however, I've only been able to exit with total success a few times, but at least the losses on the losers were mitigated to some extent by using the same strategy. I write about making money, saving money, and investing money so that money can go to work, take on a life of its own, and leave people free to pursue their other interests. I picture wealth creation as similar to forming a snowball that will roll downhill indefinitely increasing in both size and speed. Similar to the pathless path that leads to existential understanding, the path to financial freedom requires freedom from culturally-indoctrinated ideas, a willingness to leave the crowd behind, and significant changes in behavior. From what I've seen, very few people are seriously interested in either path. In the words of Byron Katie, "That's just the way of it." LOL I agree, which is why I'm suggesting that the strategy you recommend is emotionally driven, along with the rest of the market. |
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Post by zendancer on Aug 30, 2016 10:10:17 GMT -5
The strategy I described is not about trying to feel better. It's simply a viable way to get out a stock that appears to be a long-term loser. The goal is to get out of the stock with the least loss possible, and it's a much riskier approach than using the same strategy with a stock that appears to be a long-term winner. With a winner, you can use the same strategy in an effort to both multiply the gains, and also to lock in gains along the way. With a loser you're just trying to get out. When I back-tested the strategy with winners, trading the oscillations increased overall gains about 4%, but in some rare cases (such as HIMX) gains were huge. When HIMX ran from about $6/share to $14/share, I traded the oscillations continually, and sequentially locked in gains up to $11, where I finally exited. Later, I bought the stock back at about $6 or $7. A buy and hold investor over that same period of time (about six months if I remember correctly) would have had no gain whatsoever. On long-term losers, however, I've only been able to exit with total success a few times, but at least the losses on the losers were mitigated to some extent by using the same strategy. I write about making money, saving money, and investing money so that money can go to work, take on a life of its own, and leave people free to pursue their other interests. I picture wealth creation as similar to forming a snowball that will roll downhill indefinitely increasing in both size and speed. Similar to the pathless path that leads to existential understanding, the path to financial freedom requires freedom from culturally-indoctrinated ideas, a willingness to leave the crowd behind, and significant changes in behavior. From what I've seen, very few people are seriously interested in either path. In the words of Byron Katie, "That's just the way of it." LOL I agree, which is why I'm suggesting that the strategy you recommend is emotionally driven, along with the rest of the market. What you're saying doesn't make much sense to me. When you buy a product on sale at a grocery store, is that an emotionally-driven decision? I see it as a logical emotionally-neutral decision. |
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Post by laughter on Aug 30, 2016 13:09:21 GMT -5
Bear in mind that it's a strategy you might use for a stock that you've got a gain on as well, selling at local peaks, and buying back to lower your cost basis. If you do it successfully you don't have to wait for the price to double to be playing it 100% safe with the position. The bottom line is that it always comes down to the same uncertainty. You're not certain that you're at the bottom in the scenario that began the discussion, but you're sure enough that you think buying back is a low risk. It only pays off if the stock is volatile, and not all volatile stocks are bad investments in the long term. ZD stated that the stock in the scenario in question would not be purchased and sniggled by an uninvested investor. (You may not agree) That tells me that the strategy being employed by the one facing a loss is not viable. Hencely, I'm trying to turn attention to why he's using a strategy that is not viable in that case. There's no denying the emotion of the market, and there's also no denying that those that keep their heads when all those about them are running around like decapitated chickens tend to do well. The rational basis for sniggling up to a loser is, as mentioned twofold: (1) you make the decision that the loser is likely at the bottom (2) you have a relative comparative advantage of familiarity with both the loser's story, and it's "action" in the market, that is, a feel for its volume and volatility, all other things being equal such as season, earnings cycle, macro events, etc. (which is saying a mouthful). Now, there is a whole branch of this culture known as "technical analysis" that applies sophisticated multivariate abstractions to each those factors I listed in those two sentences and presents information to the trader in the form of augmented charts. Where the professionals have the edge is not only with inside information, but also in the teams of analysts they have generating such charts. All that said, because the big boys employ many different strategies with various time horizons, they often get caught with their pants down because of the inherent unpredictability of life. But, much like a car manufacturer might employ actuaries to figure in the cost of not perfecting a potential defect in terms of wrongful death payouts, the occasional panic-selling trading loss is figured in as a cost of doing business in the long run. It's true that the best opportunities for the market outsider lie in dispassionate observation of emotionally-driven bad decisions of the other market players. But on a trade-by-trade basis, there's always an element of intuition in pulling the trigger. Sniggling a loser is like any other trade, and you really have to have done it to appreciate where the heart/head interface is with it.  |
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Post by zendancer on Aug 30, 2016 13:55:23 GMT -5
Sniggling does not apply to losers; it only applies to winners. Last night Cramer told someone on his stock show that if a stock gains 50%, it's wise in his opinion to take 25% off the table, and if a stock gains 100%, it's wise to take 50% off the table. From that point on you're playing with the house's money, and none of your original investment money is at risk.
Poker players who are winning often do the same thing. My dad once went to Vegas with one of his clients, who was what Vegas people call "a whale." My dad watched him play cards all night, and thought that the guy had lost a lot of money. When they left the table and went to the cashier, my dad was astonished at all the chips the guy pulled out of his pockets and cashed in. He had sniggled them off the table so that the dealers would not realize how much he was winning.
A stock that loses half its value will sometimes stabilize and oscillate within a range. If the long-term prospect for the stock has changed due to a black swan event or something similar, and the stock appears to be range-bound, that's when the selling and buying back strategy may help reduce the cost basis enough to exit the stock. This is what's happened with the solar energy and alternate energy stocks. Almost no one saw the dramatic drop in oil prices that occurred, and that dynamic has changed a lot of stock market calculations. people are now buying SUV's again, and the alternate energy company stock prices have been hammered. Currently, most analysts seem to think that low oil prices will continue for an extended period of time, so someone stuck in a solar energy stock might want to find a way to exit his/her position with as small a loss as possible so that the money could be deployed more effectively elsewhere.
Some investors use stop/loss orders to prevent losing more than a limited amount of money on a price drop, but I've seen the market makers use "crazy Ivans" too many times as a way to scoop up cheap shares from risk-averse 0people using such orders. When market makers do that kind of manipulation, I just take advantage of the "crazy Ivan" to add more shares. LOL
I have a relatively low opinion of WS fund managers because less than 20% of them can consistently beat the S&P 500.
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Post by laughter on Aug 30, 2016 18:28:01 GMT -5
Sniggling does not apply to losers; it only applies to winners. Last night Cramer told someone on his stock show that if a stock gains 50%, it's wise in his opinion to take 25% off the table, and if a stock gains 100%, it's wise to take 50% off the table. From that point on you're playing with the house's money, and none of your original investment money is at risk. Poker players who are winning often do the same thing. My dad once went to Vegas with one of his clients, who was what Vegas people call "a whale." My dad watched him play cards all night, and thought that the guy had lost a lot of money. When they left the table and went to the cashier, my dad was astonished at all the chips the guy pulled out of his pockets and cashed in. He had sniggled them off the table so that the dealers would not realize how much he was winning. A stock that loses half its value will sometimes stabilize and oscillate within a range. If the long-term prospect for the stock has changed due to a black swan event or something similar, and the stock appears to be range-bound, that's when the selling and buying back strategy may help reduce the cost basis enough to exit the stock. This is what's happened with the solar energy and alternate energy stocks. Almost no one saw the dramatic drop in oil prices that occurred, and that dynamic has changed a lot of stock market calculations. people are now buying SUV's again, and the alternate energy company stock prices have been hammered. Currently, most analysts seem to think that low oil prices will continue for an extended period of time, so someone stuck in a solar energy stock might want to find a way to exit his/her position with as small a loss as possible so that the money could be deployed more effectively elsewhere. Some investors use stop/loss orders to prevent losing more than a limited amount of money on a price drop, but I've seen the market makers use "crazy Ivans" too many times as a way to scoop up cheap shares from risk-averse 0people using such orders. When market makers do that kind of manipulation, I just take advantage of the "crazy Ivan" to add more shares. LOL I have a relatively low opinion of WS fund managers because less than 20% of them can consistently beat the S&P 500. Yes, this more precise and quantitative definition of "sniggle" should likely clear up any lingering confusion on the issue.  |
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Post by enigma on Aug 30, 2016 19:26:38 GMT -5
I agree, which is why I'm suggesting that the strategy you recommend is emotionally driven, along with the rest of the market. What you're saying doesn't make much sense to me. When you buy a product on sale at a grocery store, is that an emotionally-driven decision? I see it as a logical emotionally-neutral decision. I'm not making myself clear. Thanks for hanging in with me. I'm very interested in what's happening here. You have said that an investor would not buy a stock that was on the rebound, for the purpose of making a profit by trading on the short term volatility. You said yourself that overall the practice yielded 4% for you, so given the risk, I agree with you that it is not a particularly good investment strategy. However, you do recommend that strategy to one who already owns the stock and is in a loss position. What makes his situation different such that a strategy that is not viable for others is appropriate for him? You say it's because he wants to get rid of the stock, but deciding when to sell is a different strategy from selling and buying repeatedly to try to adjust 'cost basis'. The latter does not generally get rid of the stock, only selling the stock and not buying it back does. What the investor is doing in trying to adjust the cost basis in this case is to recover some of his losses, and by your own admission, he's doing it using a strategy that is not viable. He's trying to turn a loser into a semi-winner by taking on risk that is not advisable under normal circumstances. I'm saying he's acting irresponsibly because he doesn't like to lose. He would be better off selling and taking his lumps, then investing elsewhere more wisely. A strategy that is not viable for a calm investor is also not viable for a frustrated one. |
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Post by zendancer on Aug 30, 2016 20:20:51 GMT -5
What you're saying doesn't make much sense to me. When you buy a product on sale at a grocery store, is that an emotionally-driven decision? I see it as a logical emotionally-neutral decision. I'm not making myself clear. Thanks for hanging in with me. I'm very interested in what's happening here. You have said that an investor would not buy a stock that was on the rebound, for the purpose of making a profit by trading on the short term volatility. You said yourself that overall the practice yielded 4% for you, so given the risk, I agree with you that it is not a particularly good investment strategy. However, you do recommend that strategy to one who already owns the stock and is in a loss position. What makes his situation different such that a strategy that is not viable for others is appropriate for him? You say it's because he wants to get rid of the stock, but deciding when to sell is a different strategy from selling and buying repeatedly to try to adjust 'cost basis'. The latter does not generally get rid of the stock, only selling the stock and not buying it back does. What the investor is doing in trying to adjust the cost basis in this case is to recover some of his losses, and by your own admission, he's doing it using a strategy that is not viable. He's trying to turn a loser into a semi-winner by taking on risk that is not advisable under normal circumstances. I'm saying he's acting irresponsibly because he doesn't like to lose. He would be better off selling and taking his lumps, then investing elsewhere more wisely. A strategy that is not viable for a calm investor is also not viable for a frustrated one. I'm not making myself clear either. The 4% additional gain from trading did not come from trying to exit an underwater stock. It came from multiplying the gains of stocks that were worth holding for the long term. The larger percentage gains came from buying stocks that appeared undervalued, trading the oscillations on the way up, and finally exiting at a target price that seemed fairly valued. As Laughter pointed out, the risk of playing the game in reverse with an underwater stock is dependent upon the history of the stock, and the investor's calculation of both risk and potential gain. There is an underlying value to an underwater stock as long as the company isn't going bankrupt. An investor can estimate that value, look at the trading range, and decide if the risk of selling and buying back is reasonable or not. It's not a totally blind calculation. Whether someone feels comfortable doing that usually depends upon the investor's past experience and general sense of what seems like the best action at the time. If the investor sells a portion of his shares, and can't buy them back, the effect is the same as if he simply sold the shares. If he's able to buy them back, then his cost basis becomes lower. The strategy is only a total loser if a company is going bankrupt and the investor is not aware of that. So far, I've only seen that happen once or twice in over 20 years of following the market. When a company is going bankrupt, there are usually very good signs of that, and investors simply dump their shares and take their loss. As I noted, some people use stop losses to avoid large losses, but frequently those people miss out on big gains because of market maker manipulations of the stock. Each investor has to decide for him/herself the approach to all of these issues that seems most logical. Some people are highly risk averse, and some are not. What really matters is the long-term track record of whatever approach one decides to use. As I also noted, if an investor can't beat the S&P 500, it makes more sense to buy an index fund and forget trying to pick stock winners. |
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Post by enigma on Aug 30, 2016 22:20:43 GMT -5
I'm not making myself clear. Thanks for hanging in with me. I'm very interested in what's happening here. You have said that an investor would not buy a stock that was on the rebound, for the purpose of making a profit by trading on the short term volatility. You said yourself that overall the practice yielded 4% for you, so given the risk, I agree with you that it is not a particularly good investment strategy. However, you do recommend that strategy to one who already owns the stock and is in a loss position. What makes his situation different such that a strategy that is not viable for others is appropriate for him? You say it's because he wants to get rid of the stock, but deciding when to sell is a different strategy from selling and buying repeatedly to try to adjust 'cost basis'. The latter does not generally get rid of the stock, only selling the stock and not buying it back does. What the investor is doing in trying to adjust the cost basis in this case is to recover some of his losses, and by your own admission, he's doing it using a strategy that is not viable. He's trying to turn a loser into a semi-winner by taking on risk that is not advisable under normal circumstances. I'm saying he's acting irresponsibly because he doesn't like to lose. He would be better off selling and taking his lumps, then investing elsewhere more wisely. A strategy that is not viable for a calm investor is also not viable for a frustrated one. I'm not making myself clear either. The 4% additional gain from trading did not come from trying to exit an underwater stock. It came from multiplying the gains of stocks that were worth holding for the long term. The larger percentage gains came from buying stocks that appeared undervalued, trading the oscillations on the way up, and finally exiting at a target price that seemed fairly valued. As Laughter pointed out, the risk of playing the game in reverse with an underwater stock is dependent upon the history of the stock, and the investor's calculation of both risk and potential gain. There is an underlying value to an underwater stock as long as the company isn't going bankrupt. An investor can estimate that value, look at the trading range, and decide if the risk of selling and buying back is reasonable or not. It's not a totally blind calculation. Whether someone feels comfortable doing that usually depends upon the investor's past experience and general sense of what seems like the best action at the time. If the investor sells a portion of his shares, and can't buy them back, the effect is the same as if he simply sold the shares. If he's able to buy them back, then his cost basis becomes lower. The strategy is only a total loser if a company is going bankrupt and the investor is not aware of that. So far, I've only seen that happen once or twice in over 20 years of following the market. When a company is going bankrupt, there are usually very good signs of that, and investors simply dump their shares and take their loss. As I noted, some people use stop losses to avoid large losses, but frequently those people miss out on big gains because of market maker manipulations of the stock. Each investor has to decide for him/herself the approach to all of these issues that seems most logical. Some people are highly risk averse, and some are not. What really matters is the long-term track record of whatever approach one decides to use. As I also noted, if an investor can't beat the S&P 500, it makes more sense to buy an index fund and forget trying to pick stock winners. You said, "When I back-tested the strategy with winners, trading the oscillations increased overall gains about 4%". That means trading on the oscillations increased the gains by 4%. That's what I meant when I said " overall the practice yielded 4% for you". I guess what I'm trying to say (which is not about the 4%) is far more complicated than I thought it was. Anyway, thanks for the investing lessons. |
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Post by preciocho on Aug 31, 2016 0:51:52 GMT -5
Sniggling does not apply to losers; it only applies to winners. Last night Cramer told someone on his stock show that if a stock gains 50%, it's wise in his opinion to take 25% off the table, and if a stock gains 100%, it's wise to take 50% off the table. From that point on you're playing with the house's money, and none of your original investment money is at risk. Poker players who are winning often do the same thing. My dad once went to Vegas with one of his clients, who was what Vegas people call "a whale." My dad watched him play cards all night, and thought that the guy had lost a lot of money. When they left the table and went to the cashier, my dad was astonished at all the chips the guy pulled out of his pockets and cashed in. He had sniggled them off the table so that the dealers would not realize how much he was winning. A stock that loses half its value will sometimes stabilize and oscillate within a range. If the long-term prospect for the stock has changed due to a black swan event or something similar, and the stock appears to be range-bound, that's when the selling and buying back strategy may help reduce the cost basis enough to exit the stock. This is what's happened with the solar energy and alternate energy stocks. Almost no one saw the dramatic drop in oil prices that occurred, and that dynamic has changed a lot of stock market calculations. people are now buying SUV's again, and the alternate energy company stock prices have been hammered. Currently, most analysts seem to think that low oil prices will continue for an extended period of time, so someone stuck in a solar energy stock might want to find a way to exit his/her position with as small a loss as possible so that the money could be deployed more effectively elsewhere. Some investors use stop/loss orders to prevent losing more than a limited amount of money on a price drop, but I've seen the market makers use "crazy Ivans" too many times as a way to scoop up cheap shares from risk-averse 0people using such orders. When market makers do that kind of manipulation, I just take advantage of the "crazy Ivan" to add more shares. LOL I have a relatively low opinion of WS fund managers because less than 20% of them can consistently beat the S&P 500. I'm surprised they didn't chop his fingers off! I just started grinding the internet games again and playing deep stack poker is an entirely different ball game. People fear the big stack, which is the good thing. But you can also double up the other big stacks, which leads to a bait and predator dynamic that can be fun to observe. |
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Post by zendancer on Aug 31, 2016 7:19:07 GMT -5
I'm not making myself clear either. The 4% additional gain from trading did not come from trying to exit an underwater stock. It came from multiplying the gains of stocks that were worth holding for the long term. The larger percentage gains came from buying stocks that appeared undervalued, trading the oscillations on the way up, and finally exiting at a target price that seemed fairly valued. As Laughter pointed out, the risk of playing the game in reverse with an underwater stock is dependent upon the history of the stock, and the investor's calculation of both risk and potential gain. There is an underlying value to an underwater stock as long as the company isn't going bankrupt. An investor can estimate that value, look at the trading range, and decide if the risk of selling and buying back is reasonable or not. It's not a totally blind calculation. Whether someone feels comfortable doing that usually depends upon the investor's past experience and general sense of what seems like the best action at the time. If the investor sells a portion of his shares, and can't buy them back, the effect is the same as if he simply sold the shares. If he's able to buy them back, then his cost basis becomes lower. The strategy is only a total loser if a company is going bankrupt and the investor is not aware of that. So far, I've only seen that happen once or twice in over 20 years of following the market. When a company is going bankrupt, there are usually very good signs of that, and investors simply dump their shares and take their loss. As I noted, some people use stop losses to avoid large losses, but frequently those people miss out on big gains because of market maker manipulations of the stock. Each investor has to decide for him/herself the approach to all of these issues that seems most logical. Some people are highly risk averse, and some are not. What really matters is the long-term track record of whatever approach one decides to use. As I also noted, if an investor can't beat the S&P 500, it makes more sense to buy an index fund and forget trying to pick stock winners. You said, "When I back-tested the strategy with winners, trading the oscillations increased overall gains about 4%". That means trading on the oscillations increased the gains by 4%. That's what I meant when I said " overall the practice yielded 4% for you". I guess what I'm trying to say (which is not about the 4%) is far more complicated than I thought it was. Anyway, thanks for the investing lessons. Well, over the last two posts I finally understood what you were saying (even about the emotional aspect, which wasn't at all clear to me initially), and I actually agree with most of the points you made. Looking back, I can see that there were a lot more issues involved in some of the actions I've taken than I supposed. Even though I trade a lot, I usually hold core shares for long-term appreciation. This allows for daily excitement, but prevents being left behind in case the stock goes up and does not fall back. I have never back-tested the total game because I trade so often it would be too tedious and time-consuming to do without some sort of computer program. Out of curiosity, however, I have looked at several individual stocks that were winners because I wondered what would have happened if I had not traded at all. In one case, a stock roughly doubled in value, so I would have had a 100% gain if I had never traded a single share. I ended up with about a 104% gain, so the trading had a small positive effect on the net result, but it provided a lot of excitement along the way. For someone else, that small additional gain might not have been worth the trouble, but considering my personality, it was great fun, and added a few pennies to the overall result. In other cases, the trading gains turned out to be greater than I thought because I often bought back more shares than I sold (ie: if I lowered the cost basis $200, I put the $200 into more shares rather than buying back the same number of shares). In that way the total number of shares kept growing, so when future shares were sold, the gains were locked in on a greater number of shares than before. That's something that I had never considered or calculated before. Last night I looked back at some trading that I assumed was done in a sole effort to exit a stock. It now appears that in most cases the motivation was not nearly so clear cut. In cases where that was the sole motivation, I would have been better off to have done exactly what you suggest--simply sell the stock and invest elsewhere. In other cases I still had faith in the long-term prospects for the stock, but did not have sufficient patience to wait for a price recovery, so I tried to lower my cost basis as an attempt to increase the likelihood of larger gains in the future and to speed up the process. In retrospect it might have been wiser to simply be patient, but I haven't yet analyzed the trades well enough to know for sure. Your questions also made me re-think the stop loss issue. Although I would never post a stop loss with a broker (because the market makers would then see it and could take advantage of it), it might be worth keeping a stop loss amount in mind, and selling a stock when it reached that point (something below 10% because 10% is the common set point for many investors). Unfortunately, value investors have so much success doubling down on stocks that fall in price, that a historical pattern probably develops that encourages them to stay with a falling stock more out of habit and past successes than pure logic. Going forward I'm not sure what the best approach might be. I have a feeling that intuition, past experience, and subtle patterns of stock behavior occurring below the level of conscious perception may be determining what's happening more than conscious rational thoughts. *Outer Limits music theme plays here* AAR, you've given me a lot of food for thought. As an investor who's had consistent success over a long period of time, I don't know what specific tweaks (other than having more patience) might improve the overall success rate, but you can be sure that I'll be thinking about it. haha. |
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