Don't Be Held Hostage to Loser Stocks
By Rev Shark
RealMoney.com Contributor
5/24/2006 9:17 AM EDT
"Self-preservation, nature's first great law, all the creatures, except man, doth awe."
-- Andrew Marvell
In a free-falling market, many market participants forget that their top priority isn't to make money -- it's to protect their capital. You have to stay in the game to have any chance of producing profits. Unlike in baseball, if you swing for the fences and strike out, you are at a major disadvantage because you have to make up your losses before you can make further advances.
One of the great dilemmas of a market meltdown is whether to hold on to stocks that are falling apart because we are convinced they have a bright future, or to sell and protect our capital and look to reenter at a future date. The decision is a much more difficult one in practice than in theory.
Quite often we don't sell when a stock first begins to pull back, and then as it falls further we tell ourselves it's too late to sell and we might as well hold on and simply wait for it to recover. This can be a source of great anguish, particularly when the market plummets for days at a time with only brief bounces.
When I find myself stuck in a downtrending stock I am often better off selling and taking my loss, and then looking for a different stock in which to try to recoup my money. Quite often the stock I was holding on to is not going to be the best-performing stock once the market turns around. A stock that was initially promising but disappoints often carries a lot of emotional baggage, and it's hard to do anything other than stand around as losses mount. It can be very tough to escape that condition -- but amazingly refreshing when we do.
Investors often overlook how selling a stock that is a thorn in your side can free you up for better results in the days ahead. The market will always have great opportunities for us if we have capital and aren't buried with stocks with big losses. Focus on self-preservation in this tough market and the money-making opportunities will take care of themselves.
The market has bounced back from some surprisingly intense selling right after the bell last night. I'm not sure exactly, but I believe the reason was a combination of a big sell order, bird-flu news, and fear that the intraday reversal would lead to pervasive weakness overseas. In any event, things look much better this morning, although we are still below the closing levels of last night. The durable goods data was soft and that is boosting the bond market; it is seen as "market friendly" because it's anti-inflationary, but it is a volatile number and may be simply a reflection of choppy orders in the aerospace business.