Most of you have heard or have read the book on how a maid became a millionaire. You have not seen the maid’s ledger. You have not seen the maid’s trades. You did not even try to calculate if the figures written with regards to the monthly amount saved/deposited by the maid and the gains add up but you believed because it’s not really about the maid rather it is about hope that an ordinary person can be a millionaire through stock trading. You got caught up and fell in love with the story that you ventured into stock trading/investing. Next thing you know you have opened an account and you are ready to become the next millionaire. You have no idea how stock market works. No clue on why people buy and sell stocks. No idea what happens after you click the buy and sell button but fueled by the thought that a maid became rich through stock market, you continued your path. Fast forward a few years later. You know how the market works. You have had a lot of experience. You have lost a lot. You found yourself asking questions such as “why do I keep losing?” “bakit ako naipit sa KPPI?” “bakit ang laki ng loss ko sa CHP?”
I asked a question about cutting losses in Trader’s Lounge today. Look at the picture below and see some of the answers traders gave me.
All of their answers were right. They all presented valid points. I promised them I would give them my answer as well but before i get to that let us talk about cutting losses first. Importante ba ang pag cut ng losses? Here let me show you.
It is a 96% loss! Can you picture it out? If you had 100k pesos invested on X, you will have 4k pesos now. If you had 1 Million pesos invested in X, all that’s left sayo is 40k pesos. “Sa example lang yan! Di naman nangyayare yan sa totoong buhay!” These are some of the portfolio losses that traders have sent me this year.
“Maling stock binili nila eh, kasalanan nila yun“ NOPE! Lahat ng tao na bumibili ng shares ng stock ay bumibili dahil umaasa na kikita ng pera . Traders and investors buy stocks thinking na kikita sila. Walang tao na bumibili ng stock para malugi.
Let us search sa internet kung ano masasabi ni investopedia sa mga dahilan bakit ayaw magcut ng mga traders at naghohold sila kahit grabe na ag loss.
Here are four reasons according to investopedia:
1. Don’t Stocks Always Rebound?
A glance at a long-term chart of any major stock index will see a line that moves from the lower-left corner to the upper right. The stock market, over any long-term period, will always make new highs. Knowing that the stock market will go higher, investors mistakenly assume that their stocks will eventually bounce back. However, a stock index is made up of successful companies. It is an index of winners.
Those less successful stocks may have been part of an index at one time, but if they’ve dropped significantly in value, they will eventually be replaced by more successful companies. The indexes are always being replenished by dropping the losers and replacing them with winners. Therefore, looking at the major indexes tends to overstate the resiliency of the average stock, which does not necessarily bounce back. In fact, many companies never regain their past highs and some even go bankrupt.
2. Refusing to Accept Blame
By avoiding selling a stock at a loss, many investors do not have to admit to themselves that they’ve made a judgment error. Under the false illusion that it is not a loss until the stock is sold, they elect to continue to hold a losing position. In doing so, they avoid the regret of a bad choice. After a stock suffers a loss, many investors plan to hold onto it until it returns to its purchase price. They intend to sell the stock once they recover this paper loss. This means they will break even and “erase” their mistake. Unfortunately, many of these same stocks will continue to slide.
3. Refusing to Accept Blame
When stock portfolios are doing well, investors often tend to them like well-maintained gardens. They show great interest in managing their investments and harvesting the fruits of their labor. However, when their stocks are holding steady or are dropping in value, especially for longer-term periods, many investors lose interest. As a result, these well-maintained stock portfolios start showing signs of neglect. Rather than weeding out the losers, many investors do nothing at all. Inertia takes over and, instead of pruning their losses, they often let them grow out of control.
4. Refusing to Accept Blame
Hope is the belief in the possibility of a positive outcome, even though there is some evidence to the contrary. Hope is also one of the primary theological virtues in various religious traditions. Although hope has its place in theology, it does not belong in the cold, hard reality of the stock market. In spite of continuing bad news, investors will steadfastly hold onto their losing stocks, based only on the faint hope that they will at least return to the purchase price. The decision to hold is not based on rational analysis or a well-thought-out investment strategy, and, unfortunately, wishing and hoping a stock will go up does not make it happen.
“Di kami kasali diyan kasi investor kami. Bluechip lang binibili namin. Mga matitibay na kumpanya!”. Take a look at this bluechip stock.
That is a whooping 70% loss!
When most new investors begin their careers the first and often the only thing on their mind is “how do I make money?”. To analyze a potential Speculative Investment they research stocks, check mentions on social media, calculate an entry, forecast potential exit strategies and then lastly click the buy button. Then they watch the stock like a hawk waiting for their profit target to be reached to cash in on all that hard work. Even though this may seem like a very logical process it will, in most cases, inevitably blow up their accounts.
You probably heard about “loss aversion.” If not, according kay Lone Stock Trader ang loss aversion daw refers to our tendency to prefer avoiding losses rather than acquiring equivalent gains.
In other words, our nature dictates that we are more likely to let our losers run, in order to avoid taking a loss, and cut our winners short in order to avoid losing the small gain we have.
I could go on and on sa mga reasons bakit hindi nagkacut loss ang mga traders as well as generic na mga payo on how you could do it. Mga tipong “Cut your losses like a pro!” (I always laugh hard when I read such post on Facebook). Let me be straight forward on answering my own question na napost ko sa Trader’s Lounge. This is not some generic statement na nakukuha ninyo sa iba. I’m a trader sa PSE so lahat sasabihin ko applicable sa inyo if you trade sa PSE.
Close your door.
Dim your lights.
My answer is going to blow your mind.
Paano ka makakapag cut loss ng effective at maayos? LIITAN MO POSITION MO! Reduce mo size mo. Bawasan o liitan mo tinataya mo na pera. Ganun lang ka simple yon. Di mo kailangan magpraktis sa harap ng salamin ng “cut with no mercy! cut with no mercy! cut with no mercy!” Liitan mo lang position mo. Balikan natin ang example kanina.
If 100k pesos pera mo, 4k pesos na lang natra. If 1M pesos pera mo 40k pesos na lang natira. The reason bakit nagka ganon eh dahil nung mga nasa 20% pa lang ang loss mo sobrang laki na nun para e cut mo. Kaya hinayaan mo lang until umabot sa 96%. Yung 20% ng 100K pesos is 20k at 200k naman if 1 Million. Now, lets say 20k lang nilagay mo. At 20% that’s 4k pesos lang. Cutting a stock with 4k peso loss is not as hard as having a 20k loss or a 200k loss. Look at your port now and try nyo e imagine if maliit lang position ninyo. Would your port be the same?
Most if not all na nagrereklamo na ipit na ipit sila ay dahil yan sa nag “ALL IN” sila. Topic na to is actually about position sizing. I will have a post about position sizing soon at ang proper way ng pag gawa nun. If interested kayo sa position sizing you can go sa Trader’s Lounge and look for that topic sa weekly lessons doon kasi nadun yun.
You don’t believe me? Of course! How can you eh di naman tayo magkakilala. One thing I can assure you is kapag pumunta ka sa Trader’s Lounge at e try mo ang tinatawag namin na 8K CHALLENGE, you will believe me. You won’t just believe me, you would thank me. You won’t just thank me, you would wish you have met me way before ka bumili ng NOW or ISM or FRUIT or AXLM. You would learn how to cut your losses sa 8k challenge. Iba iba tayo ng tolerance sa risk. 10k na cut grabe na sa iba while sa iba ay wa lang. Sa 8k challenge you will find out ano tolerance level mo sa risk.
We often hear about success stories. The millionaire maid. The millionaire driver. People who lost a lot of money sa stock trading are often forgotten or not mentioned. I like to highlight yung experiences ng mga natatalo para makunan ng aral kaya ang title ng blog post na to is How My Maid Lost 1 Million in Stock Market… and yes, you could too! Just to rub it in, look how much you need to gain to break even sa picture below.
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