A friend of mine has invested 70% of his capital into three stocks. He is short on all three. He placed the trades sometime in the last week or two. Currently, in aggregate he is a little more than 20% down. I believe it was two days ago when he was a mere 7% down. I say mere, because a few days before that he was 18% down. When he was 7% down I asked him what he was going to do. He said he might sell half, so he would aleviate a little of the stress from being in losing positions. He didn't. I'm not sure what he thinks about that decision today. This is the same friend who laughed when I told him about another friend who lost 65 million over the course of the tech crash. "Why didn't he sell!" he said. "He knew at 55 he should have gotten out! surely at 45! at 10, he probably didn't care anymore, but he probably cared again when it hit 5 million!" (that stock is worth 300k today.) He laughed at that story, but now he's sitting on a significant loss, and he's convinced the market will fall again. Convinced as much as this other friend was who thought the market would go back up. He's drawn the trend lines, he's analized the market sentiments, he's convinced the market will do what he expects. Meanwhile, he clings to his antacid like a drowning man clings to a raft. My feeling is he should have stopped out when he realized his timing was wrong -- when he was down a set percentage of his equity -- his predetermined risk. This friend has made a lot of money by riding though situations like this before, so he is adamant about staying in. I hope he's right, but you know what happens when you start to hope... I need to ask him what he'll do if he reaches 25% down, and then 30. I wonder if he's capable of stopping out with losses that great. We'll see.
I stick with the William O'Neill 7% stop loss rule(Investors Business Daily). Ok, sometimes it ends up being 10%. The point is, "When in doubt, get out." You can always make the money back later somewhere else. Snake .
Actually when I read your second sentence where you say "He is short on all three" I am wondering why the rest of your post sounds like he is long. Your post doesn't make much sense to me.
It makes sense to me. The guy is short. Stocks went up. He's down 20% in his account. He's convinced market will fall again and he'll recoup his loss. I agree he should have cut and run. Snake .
He says his friend is short and then he says "When he was 7% down I asked him what he was going to do. He said he might sell half, so he would aleviate a little of the stress from being in losing positions"
Yes the market will fall again,but how far up before it does? The problem is he doesn't know what his pain threshold is and when he may start to panic. Always set a stop loss within 10%, 5 % is better.
posted by Freeman --------------------------------------- . He is short on all three. He placed the trades sometime in the last week or two. -------------------------------------------------------------- I guess it would make more sense to know which stocks this person is in. I too think this market is a over bought. I would not have held like him, but rather sold short at the higher price especially two weeks ago when it seemed obvious we were over sold after Sept's. fall. What stocks are involved?
Unfortunately, since we seem to be having a bit of trouble here at resistance, the market may well fall sooner rather than later, which will reinforce his behavior. If he makes it through this cycle, he may not make it through the next. --Db