You read a good thesis for a stock or hear a good story about a company’s prospects on a podcast. This enthuses you to do a little more research. This looks like there’s a good prospect for a short term gain. Great let’s buy some of this, it’s a risk but a small punt could be good. You follow the price for a few weeks, looks like the hypothesis might pan out.
I been through this a couple of times in the last year and have learned a hard lesson.
I bought a few shares in Cairn due to good sentiment in the market about a potential positive outcome from a legal case with the Indian government. I thought there was a good probability of a 20% gain within the next few months. Within 3 months it was 36% up on the buy price. Did I sell? No, I took my eye off the original goal which was to trade this stock for a quick profit, and hung on in there, missing the opportunity to take a profit. Over the following month or so it dipped down to a 12% gain then later bounced back up to 22%. Did I sell? No. once again I missed the opportunity.
I invested in a super high risk single drug biotech called Geron on the prospect of a positive outcome of 2nd stage drug trials. 40 days later it was up 105%. Did I sell? No once again, I held on when I should have sold. Since then Geron’s partner and major funder has pulled out of their contract and the gains are all wiped out and I’m sitting on a loss.
My investing to date has been long term buy and hold, so my habit is generally not to sell. These two shares were Trades not Investments so I should have set myself hard rules about when and why to sell at the outset. Then stuck to them.
Set downside rules such as:
- Sell if the price drops by x%
- this is to protect the capital (live to trade again)
- set the percentage to something that is reasonable for the volatility of the share, not too small as that might cause you to sell too soon just eroding the capital
- Sell if there is some drastic change to the thesis that will mean there will be no upside
Set a target:
- Have a target % gain that you are aiming for, note this as a target price to sell at or trigger your exit strategy
- Decide the exit strategy having hit that target
- Take a profit by selling a proportion or
- Set a trailing stop price so that any drop by x% less than the peak price triggers a sale
With rules such as those above, I would have been sitting on a decent profit. Instead I’m now looking at whether to hang on to Cairn as a medium to long term investment (although generally I’d prefer to be invested in renewables rather than oil). With Geron I think I’m going to have to hang in for a few weeks in case there is a dead cat bounce, then cut my losses and sell.
The lesson learned is not to trade shares without a clear intent at the outset, then rigorously apply those rules ignoring greed or fear of missing out.