Become a better investor
Lesson in Course: Medes Newsletter (advanced, 6min )
“How do I know when to sell?” is a question that is asked frequently among emerging investors I know. Unfortunately, this question is often asked after a major loss wipes out gains and sometimes entire portfolios.
“Bulls make money, Bears make money, Pigs get slaughtered”
CNBC Mad Money’s Jim Cramer mentioned he heard this phrase on the old trading desk of the legendary Steinhardt Partners. WallStreet has been in the business of moving money and investing for a long time, and this is a lesson many incredibly smart people have had to learn the hard way.
The tl;dr is don’t be a pig and be overly greedy. The chances are that sooner or later, it will catch up to you. I re-familiarized myself with this lesson recently when I was a total pig, and I lost $22K in one day because I didn’t take money off the table.
It’s very easy to be caught up in the moment where, on paper, gains continue to increase, and inflated egos and heads are dumping massive amounts of dopamine. It’s also a complete buzzkill to try to remind ourselves that the more in love with a stock or option we become, the bigger the 💔.
A market is a regular gathering of people for the purchase and sale of provision, livestock, other commodities… and in this context…stocks, bonds, ETFs, and options. People are emotionally driven and can irrationally decide to panic sell the stock in a great business whenever there is perceived fear or risk. Just because a stock price has been going up doesn’t mean it won’t go down the very next day…and the day after.
“Number one rule of Wall Street. Nobody… and I don’t care if you’re Warren Buffet or if you’re Jimmy Buffet. Nobody knows if a stock is going to go up, down, sideways, or in circles. You know what a fugazi is?…. Fugayzi, fugazi. It’s a whazy. It’s a woozie. It’s fairy dust. it doesn’t exist. It’s never landed. It is no matter. It’s not on the elemental chart.”
Since no one really knows where the stock price will be tomorrow, it’s hard to decide when to take gains. Marketing timing and speculating are incredibly difficult to get right continuously, and if anyone is claiming that they know… why are they telling?
The worst feeling is when we sell, and then the stock price continues to go up. TSLA anyone? It’s easy to feel like a complete idiot at the moment. However, let’s put our emotions aside and take a quick look at the hard facts and numbers.
Let’s say we buy a stock for $100 a share. In 3 months, the stock goes up 50%, and we feel like we’ve called it, and our position is now $150. Instead of deciding to take money off the table, we continue to hold. Suddenly, the entire market corrects, and our stock position is down 50%. How much is our position worth now?
It would seem right away that if we had a gain of 50% and a loss of 50%, we should be at the breakeven right or a net delta of 0%? Actually, this is not the case.
$100 x 50% + $100 = $150
$150 − $150 x 50% = $75
We are actually net down $25 even though the upside and downside look the same on a percentage base. Shoot, ok, what is the amount of gains we would need to make up the losses get back to $150?
($150 − $75 ) / $75 = 100%
Just because we are starting with $25 less in principal, we need double the stock gains to recover our losses. Okay, let’s say we decided to take money off the table and sell the shares when it was at $125. How much do we need to get up to the highs of $150?
($150 — $125) / $125 = 20%
We’ve now decided to buy the dip since the stock is considerably undervalued, and fortunately for us, the stock increases 50%. How does either situation look now?
$75 x 50% + $75 = $112.50
$125 x 50% + $125 = $187.50 ← Winner Winner 🐔 Dinner
Personally, I have a few rules I try to adhere to in an attempt to keep me from becoming big slices of bacon. In the process of sharing mine, I will use some jargon specific to options trading. Sign-up for Archimedes today to learn how to trade options, develop valuation targets, and perform due diligence like WallStreet.
Every emerging investor needs to have a good plan of when to take money off the table, or else we could be wiped out and end up in someone else’s rap song. A good plan will consider valuation targets, the type of vehicle, and the amount of risk we can hold in a certain position.