Let me tell you a story about the day I died,
and lived again.
Here’s an embarrassing confession, I was a fundamentalist. When I was really new, I had a choice to learn the fundamental or the technical way of analyzing. I chose to learn the fundamental first… because I thought that was an easier study and it provided cold hard facts of a company’s reality.
But let’s make a controversial stand here, my first point is fundamentalists are not traders. They are investors. And I was doing fundamental analysis… on a TA play. Can you believe that? I don’t even know what I was thinking… But I was new, and I didn’t know how these things go.
Now let’s add flavor to that. We all know that sometimes a company’s earnings will have a huge disconnect on how much their shares are being sold. They do not always reflect, because if it does, then we can all just be happy campers and relax. But I’m willing to bet that you have all witnessed a sell on news atleast once, and I was a repeat victim each time. It’s a lonely position, to finally proclaim your savior (a.k.a. financial report), only to watch in horror as my share price fell.
Here’s another thing to consider. As Pring have said, with fundamental analysis, it’s not about the news. It’s about how the people would react to those news. There’s a big difference in that.
Your major problem with fundamental analysis is that you largely depend on other people to wake up and be as smart as you in realizing that a stock is worth much, much more than what it is selling for… and it’s always difficult to expect that much out of other people.
On cutting losses and changing my perspective:
Almost every money I ever made did not touch the bank. If it did, it got transferred immediately to my broker account. The way I saw things, I have to invest NOW or risk losing the time value of money. That was the holy grail of finance books– invest. Invest now.
I worked hard and I didn’t spend needlessly. I was at this state of deprivation and sacrifice for my future when I saw my money slowly lose value. My heart was breaking every single day.
It got me reflecting if I was really better off than most people who spent lavishly on themselves. I was not. I invested my money on these “good companies” and yet it didn’t open up the doors to financial freedom. My money was not growing, it was in fact shrinking. I was down to 80% loss on my worst stock.
My unwillingness to cut those represented my denial of the truth. I often told people that I know the money is gone, I’ve accepted it. But if I accepted it, then why wouldn’t I cut it? I have not. I could not face the reality. The ship has sunk.
I have never really cut before. Not enough to instigate a change in me.But this one did, and the moment I did, I cried my eyes out. It was so liberating, and so painful at the same time. I had finally admitted defeat. I was wrong, so wrong for a long time. And if only I had tried to correct it sooner, if only I had admitted my mistake, then it would have saved me. It would have saved me earlier.
I remember days of watching the market shrink my money. I remember closing the tab as soon as I open it. “Not today.”, I said. “Maybe tomorrow?” That day never came. It slipped, and dove, and fell down. My money. The ones I intended to grow through compounding interest. Shrinking.
I was changed that day. It was painful but the pain is nothing compared to how I feel while holding the losing trade. Freedom is a much, much better company than losing money while I fight to be hopeful in a hopeless situation.
I cried that day, even to a point that I almost felt physically sick. But here’s something you should know, “Don’t cry to quit. Cry to keep going. You’re already in pain, you’re already hurt. Get a reward from it. Don’t quit.”
Because eventually, the pain will subside. The lesson will stay.
Why don’t you cut your losses?
If you really like that company, and it’s diving, cut it. Cut it. Immediately. You can always re-enter. This was what he (Zee) told me the last few minutes I hesitated.
You can always re-enter at even better positions. Maybe you can even triple your gains once it recovers back to the levels that used to be your average before the cut… specially if you successfully bottom fish after the dive. Protect your capital, keep it safe. These are your ammos.
If you don’t cut losses, those who did might have made better money somewhere else. They celebrate as you wait for something you do not know the possibilities of happening. On the same stock, however, if you have decided to re-enter, those who didn’t cut will only get a breakeven once it recovers… While you, who have, arrive at that level bagging good profit beforehand.
Cutting losses is not defeat. It’s smart trading. It’s not battle defeat, it’s another weapon you can use to win a bigger war. It’s a very important weapon too. Use it.
Trust me when I say this, the people you respect have lost more than you do. Every one did in the beginning. If you quit now, then the story is over. If you suck it up, try again, then you can change how it ends.
They sucked it up, studied hard, tried again. You can do the same.
I was out of the market a few weeks after that, I started studying harder. Eventually, the pain did subside.
Zee: So how does it feel now?
Celeste: Relaxed and more lethal. Funny combination that.
Zee: Why lethal?
Celeste: As a trader when you lack yourself of emotions, you become a more capable strategist. Holding no positions place me at the best set-up to attack accordingly. Staying in a losing trade is an overwhelmingly big distraction to rational thinking, you won’t be able to trade your other stocks well when you’re neck deep on the red with another.
What I also mean is, you won’t care about what position another person is or the world is. I wouldn’t care if Juan Dela Cruz next to me is in a potential bounce play he’s excited about. I have no position, and this gives me the power to choose. If I can’t do a bounce play, then I don’t do a bounce play.
Being able to choose my battles, based on my skills, will help me win it before I even fight.
Having, or holding a losing position, makes you feel helpless against the tides of the market.
With this, I choose where to go, and if I know I can go there. I go there. More lethal.
Zee: do you think about “what if” you held on to *stock name* and the rest?
Celeste: Sometimes, but it doesn’t do me any good na eh. I try to forget about the money I lost and potentially would have lost more or even the money I potentially didn’t lose if I cut early. Doing that will mess up my mentality on how to move next. I might get too aggressive or too conservative just because of how I feel. But well when I do, I’m glad I did. I’m really, really glad.
I remember the times I held on to it and it kicks me in the stomach every time it went down. I’m freed of that horrible torture. Truth is companies can go bankrupt or they can disappoint earnings, and once again, that’s out of my control. Atleast right now, I’m more in charge.
Placing my trust on a company’s future earnings and on the overall market players to react to that makes me feel powerless. Because what if they don’t deliver? And what if they don’t react?
Sure it’s the same about charts, it can invalidate an impending bullish pattern, but it’s more honest and upfront. Once it goes wrong, you see it immediately and you can react.
But with those fundamental plays, you’re never sure if people have factored in the “good news” because where do you see them do that? People don’t walk around with badges if they’ve heard about it. It could be another 6 months later before they realize how good the good news is.
It’s so elusive, and some people like that, sure. But if i’m going to fight a battle tugged between market buyers and sellers, I want to place myself at the best position, best probability, where I can win.
With fundamentals, you don’t KNOW if it’s even gonna kick in.
It’s like having a Charizard. Sometimes it obeys you, but sometimes it does not and Charizard is your only freaking Pokemon. You can’t have anything else.