The stock market is a brutal beast of lessons that will be forcibly learned. These lessons can defy what kind of investor you may become and how successful you may end up in the long term. One of the most important lessons that has to be learned is to sell when a stock has become a losing battle that may never be a success story.
Failure is never easy. Admitting that a stock that you invested in is a losing stock is never easy. Whether it be mental or psychological, many investors fall into the trap of buy and hold forever regardless of the losses that may occur. Stock dropped 50%? Sounds like a good hold strategy. It’ll come back someday - won’t it? Possibly.
In reality, the stock market is almost never that nice. It can become a self-defeating prophecy because investors can believe that all stocks are cyclical and that one day it will come right back up to its former glory. Unfortunately this isn’t always the case and in fact, it’s not the case for more stocks than people realize. It’s not uncommon for stocks to slump and never come back. This can cause an investor’s 10% loss when it starts going down to end up in a 50% or more loss when the stock finally tumbles over and is pronounced dead on the scene.
How does one go about separating out the cyclical and non-cyclical loses then? Review, review, review. When a stock starts to drop, one needs to simply review the stock once more as it was when it was first invested in. Look into why it may be dropping. Sometimes it is simply some short term bad news and it can be capitalized on and averaged down on. Other times it may be a sign of bigger loses to come and it’s better for investors to cut their loss. The trick is to not be too proud to sell. Admit when a stock has turned out to be a bad investment. It happens to all of us whether we like to admit it or not. Simply review, see if it’s still a good investment, then act as soon as possible. Don’t trick yourself into thinking that even though the larger picture seems bad that the company will pull through – more often than not, they won’t.
Lesson learned: cut your losses when the battle is a losing battle. Lose the smaller percentage, take it as a tax break, and reinvest what’s left into a better bet where the money lost might be found once more.