Q&A_ What is meant to never sell at a loss?Namaste!
You must have heard the words of great investor of all time.
Mr. Warren Buffett once said, “The first rule of an investment is don't lose . And the second rule of an investment is don't forget the first rule."
Losing money means, in simple terms means, selling at a loss . People get fearful and sell when the stock starts falling. There can be unlimited reasons for this happening, we will never going to find it out. What we can do, is just two things:
Buy and Sell .
As long as our sell price is greater than our buy price, we're not losing: that's our purpose here . It is a very key thing and hard to implement though.
I often wonder why the retail people don't sell, when the stock get's them 3 times profit of their buy price. This is also the case with institutions. They don't sell, when the stock gave them 3 times, but they do, when the stock has been came down up to their buying price , and they get happy thinking, that at least I have saved my capital from eroding further. NO brother, you lost opportunity cost. As soon as you sell, some of the great minds and investor buy from you (including WB). It is very very simple logic, but people make it difficult. If you can somehow counter this, a gate to investing success will open.
Anyways, look at the stock Tata Steel. Many could have bought it and sold it at a loss, between a very long period of consolidation (i.e. 13 years).
Okay, let's assume, you could have bought the stock at around Rs 516 (which is an average of swing highs and lows). Buying at a high is another a very big mistake, but I will explain it any other time.
You would be getting a return of (132% price appreciation + 3% dividend yield for 13 years = Total 171% return). That's around 13% annual average returns.
Did you lose money?
A: Of course, who sold it at a loss, loosed money. But the people who held it for these years, have made 171% return at minimum. Congratulations, you beat the market.
I know some people will say me that, why did you chose Tata Steel, why not Rpower, Unitech, Rcom, etc.
Well, I couldn't have placed all eggs in one basket. Sure some of the stocks in my portfolio will get negative returns, and even become zero. But, I am 100% sure, than there will many companies in my portfolio, which will be compensating them, and eventually make me money.
Important: "Portfolio diversification isn't important to maximize gains, but to reduce risks" . Sure, you can add some risky stocks (like small and micro-cap) to increase your returns, but primary objective here is to reduce risks. But don't overdo it i.e. more than 2-3 companies in a portfolio of 10 companies.
And, I have a method which, doesn't allow me to add more of any stock, if it is continuously falling.
Disclaimer: The analysis I have shared is based on my understanding and experience in the markets. Investment carries an element of financial risk. Please do your analysis and/or consult your financial advisor before investing. I already have some shares and may/will add more if I get another opportunity.
