Friday, September 23, 2011

Market Crash... buy more or cut loss?

Last few days, we saw the market having fun, crash like crazy, people panic selling like no tomorrow. Yesterday we saw US Dow Index down by 283 points, at the time I write this notes, it's down by another 350 points, Dow Index currently stand at 10,774. Many investors force to shake out in this volatile market with one of question in their mind, if the market go down further, should he continue to average down, or should he cut loss?
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To a new investor, he will confuse, as many will suggest to “Cut Loss”, whereas, someone might say, no, it's time to buy more so that you can average down to reduce the cost. I think in order to do the right thing (let do not care if this's correct way or not), one must understand what's the purpose or intention when he bought the stock. Is it for short term speculating purpose? Or is it for long term investment purpose? Also, he may want to find out if the share he bought is mean for speculate or investing grade.
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You should “Cut Lost” or sell first and think later if you fall under the below categories:
  1. Initially you just plan for short term to earn fast money, but something reverse happened.
  2. You can not afford to lost more that 5% of your principal.
  3. You believe the momentum theory which say that something hard to move, if move hard to stop.
  4. You are more to Technical Analysis which say that once the support line is break out, the share price will move down to next level
  5. You do not understand the company, don't know what they are doing, basically know nothing about their profit record, so better cut first and regret later
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However, you can average or buy more if you believe the below:
  1. You have proper long term plan and strategy for investment.
  2. You are prepared if tomorrow market close for few months and you fund is stuck there and you can still sleep well and enjoy life.
  3. You believe people are fearful and you want to be greedy to buy cheap now
  4. You like the Fundamental of a company and it's a 5 star investment grade.
  5. You know the company well and have done enough home work which lead you to believe that their earning is proven, consistent and having room to grow
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Every trade is a new separate decision, it got nothing to do with previous trade. "Average down" is not to be used as a reason to reduce cost. For me, if I bought a stock and it's share price went down out of my expectation, I will sell first if it's a speculate stock. Especially when I read the news on the Edge yesterday, one of the title read, "Swee Joo is to be delisted on 26 Sep 2011", just think if someone own this stock without cut loss at 5%, it will become a total loss now.
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If the stock I bought is an investment grade, I will not cut loss. However, I will not average down either, instead I will use my investment style which I feel safer in the way, see my previous post, Buy when price down or when price up?

It's a waste of time to ask why the share price going down, as there are simply too many reasons. It's better to know your position, intention or purpose of investing and the condition of the target company.
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