Sunday, February 04, 2007

They Shoot Horses, Don't They?

Very delicate subject indeed...
You did you home work, you identified a "pivot point" on the chart, you went through the balance sheet, you researched potential revenue based on products/services offered by the company, sector is hot - everything is in your favor ( speaking of long, for short - it'd be quite the same just more difficult and in reverse) and yada-yada-yada.

So, you pull the trigger and buy XYZ1, XYZ2 and XYZ3
2 weeks later
XYZ1 is up 15%, XYZ2 is flat and XYZ3 is -7%

You make executive decision to sell your XYZ3 looser (This site is not for bagholders - YES - feel deep disrespect for such), to take profits on your XYZ1 winner ( could be justifiable) AND keep your laggard, namely XYZ2 a little longer - give it the benefits of the doubt).

You are happy - you just made 2.65% on portfolio

So you replace XYZ1 with XYZ4 and XYZ3 with XYZ5 and you wait another 2 weeks.
After end of another 2 weeks XYZ4 is up 8% XYZ2 is still flat and XYZ5 is up 4%
At this point of time you begin to pay more attention to XYZ2, cheering it like a horse on a race, you say: "Come on baby, everyone is doing soooo good, wake up now..."

You stop paying attention to XYZ4 and XYZ5 and few days later they drift to negative territory, but that is fine with you - you are still up for a month.

Then you wake up in the morning, and finally XYZ2 IS MOVING, just not where you wanted it to.. it is down 40% on ...whatever news it might be ( but trust me - everything else given and stock is not moving in the direction expected 70% of the time that news WILL BE BAD)

What happened? You thought you are smarter than a market ( millions of other players),
you thought that market will discover how smart you are and your stock will go up big sooner or later.
In reality - there was a good reason for XYZ2 to lag in spite of all the good looking results of your home work - someone KNEW the truth about what will happen to the company's stock - and, believe you me, it was not pretty.
So, you wiped all profits, you are sitting on losses because of your ego ("how come I am wrong about potential of this company and stock), but from now on - it will get worse.
You will be keeping XYZ2 ( not a laggard anymore, but -40% overnight loss which you truly were not able to sell, since it gapped down right on the market open),
so you are keeping your looser, because "it is too late to sell" ( no such thing - sell it and forget it - you already lost!), guess what - it gets even worse from here - you are so terrified to see XYZ2 go down another 2%, then another 3% that you completely stopped to pay any attention to other positions and red color is all over your portfolio.

Am I making it up? If it is more convenient for you to think so, then think so.
But the truth is - if stock lags when peers outperform there are only 2 possible outcomes
1. ( best case scenario) - laggard will bring your portfolio's return below where it could be
2. (not so pretty) - laggard sooner or later will wipe out all your profits, demoralize you and as a result sooner or later you will go to the poor house


Happy trading!

P.S. Almost forgot to tell you - SELL LAGGARDS