Online Stock Trading | Cut Those Losses

Cut Those Losses


Filed Under Market Commentary |

“A prudent speculator never argues with the tape. Markets are never wrong, opinions often are.”

-Jesse Livermore

 

When it comes to stocks, everybody and his brother has an opinion. I’m no different, mind you, I have opinions of my own. Given the way this market has been behaving, however, traders would be well advised to shelve their opinions and listen to what the market is telling them. All I know is that, as of last Friday, yours truly is now 100% in cash. And that’s saying something. CMED (which apparently stands for Certain Medical Equities Drop) was the last long that I owned -that is, until it got hammered after its earnings call. I consider myself fortunate to have escaped with just a 10% loss, to be honest. It got ugly, a-Dow-down-300 points-the-day-you-lower-guidance kind of ugly. The stock closed over 15% in the red. And they tell me medical stocks are supposed to do well in bear markets.

Should I have added to my position? After all, as the saying goes, “If it looked good at $50.…” Think I should have held? Think again. Even though CMED has the word “China” in its name and earnings were in-line, there was no way on God’s Green Earth I was going to hold it, let alone add to my position. Not for all the tea in…well, China. I know professional selling when I see it. Couple that with the fact that the market has been trending lower since November, selling off on high volume and rallying on low volume, and the decision to sell was a no-brainer.

Which brings me to my point: Don’t fight the tape.

Might CMED eventually stage a comeback? Might it one day recover and go on to new highs? Perhaps. It’s a great company, after all. Yet, as the man who graces our $100 bill once said, “An ounce of prevention is worth a pound of cure.“ See, what if CMED should continue to drop? What if instead of losing 10%, I lose 20-30% or more. Boyd Hunt in The Perfect Speculator put it this way: “By not losing, one can save years and years of agony, hard work, pain and sleepless nights. Not losing is worth many years of learning in the markets.” What he was talking about is how losses have a way of adding up. Before you know it, you need a miracle just to break even. A 10% loss is manageable; a 30% loss, now you’re in it deep.

Ah, but you know CMED is going higher, right? After all, you’ve poured over the earnings and thoroughly researched the company. You buy and hold. You can wait for it to come back. Now that it’s selling at a discount, you may even buy more. Well, consider this: “Anyone who bought stocks in mid-1929 and held onto them saw most of his adult life pass by before getting back to even.” (Richard M. Salsman)

There was a time in the not too distant past when I would read a company’s quarterly report line by line, listen to their inane conference calls, and watch like a hawk for news to hit the wires -in other words, I would waste what little time The Big Man had granted me in the delusional pursuit of an “information edge.” Yet, as I learned the hard way, no such edge is to be had, not when you’re going up against financial institutions with enormous resources at their disposal, the likes of which a retail investor can only begin to fathom. You don’t think a fund with tens of millions of dollars in stock XYZ knows infinitely more about it than the Average Joe? They do, trust me; to think otherwise is hubris, plain and simple. Again, Mr. Hunt, the “perfect speculator,” sums it up perfectly: “The common man on the street has no chance of outdoing the research done by the biggest brokerages, researchers, fund managers, investment bankers, etc. These entities have the best and brightest working for them.”

This makes sense, considering that funds and institutions are responsible for roughly 75% of the market’s trading (for example, Business Week has reported that on any given day it is not unusual for Steve Cohen’s SAC Capital Partners alone to account for as much as 3% of the trading on the NYSE and as much as 1% of the NASDAQ’s -Vide: http://www.businessweek.com/magazine/content/03_29/b3842001_mz001.htm). This being the case, it doesn’t seem all that smart to fight these guys. Better to “ride their coattails,” as it were, because, like it or not, they are the market. Sure, you may see a rosy picture when looking over the balance sheet and nothing but clear skies ahead while perusing the latest analyst’s report, but, let me tell you, if the tape tells you something is wrong with your stock, something is wrong. Get out. No questions asked. Especially in a market like this.

So do I hold CMED in the face of overt institutional selling because I’m of the opinion the market overreacted? Do I add to my position because the company’s “story” remains intact? No. No questions asked means no questions asked. You sell. It’s a matter of allegiance, you see. Is your allegiance as a trader to the stock or to the tape? That’s the only question you should be asking.

Yet I imagine the question most would ask instead is this: If I sell, what then? What do I buy? Again, I defer to Mr. Hunt. “In a ten year cycle a clean bullish condition comes about three to four times,” he said. “I am focused on being that rare person who can make big money during such bullish conditions and at the same time can stay in safe modes and not lose anything during the balance of time. Almost everybody has made money in the markets at some time or another…But very few have been able to keep what they made. The market usually takes it all and more back.”

He later went on to add: “It is about the hardest lesson to learn to wait and sit tight and to do nothing, To await the right conditions and confirmation of improved probabilities of wins is not possible for the vast majority of the public.”

There’s your answer: Do nothing, sit tight. Give nothing back. Wait for the right time before buying again. When will that be? Who knows. Needless to say, it isn’t now. That’s not my opinion, that’s the market talking.

 Author Ego

P.S. It’s only right that I thank Market Speculator for allowing me to contribute something to his site. He’s a good trader and an even better man. So thanks, MS.   

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Comments

7 Responses to “Cut Those Losses”

  1. Stock Market » Cut Those Loses on March 3rd, 2008 3:39 am

    […] Author_Ego wrote an interesting post today on Cut Those LosesHere’s a quick excerpt… something is wrong with your stock, something is wrong. Get out. No questions asked. Especially in a market like this. So do I hold CMED in the face of overt institutional selling because I’m of the opinion the market overreacted? … […]

  2. Tom Shattuck on March 3rd, 2008 3:34 pm

    Great article, Author Ego. I have had the misfortune of taking a big hit on CMED recently after being reassured of it’s “bullet-proof” status as an industry leader. I am waiting it out but it pains me to see it whither..
    I look forward to future posts.
    -Tom in Boston

  3. Market Speculator on March 3rd, 2008 3:45 pm

    Great post!!! I am lucky to have you here…

    Thank you!

  4. Joshua Hayes on March 3rd, 2008 3:55 pm

    When a stock of that quality gets nailed like that, there should be absolutely NO question that this market is ALL wrong and that you should be in cash, long gold/silver, commodity related stocks, or short (which 90% should not be due to their amateur status).

    There is no reason to be long this market here with the way things look.

    For better looking stocks that look much better than CMED try SWC, CMP, NEU. If those three can build a base lasting at least seven (heck, I will take five) weeks and can then breakout on higher volume with BOP remaining green to max green the whole way I won’t be shy at all when I buy those three stocks.

    However, if they breakdown on heavy volume, print some red BOP, and the base is not flat or round but volatile and V-shaped, then I would avoid them like I should have avoided CMED.

    I took a CMED hit too. But the chart pattern with the steady run was looking SWEET!!! However, proving that it is hard to invest in stocks in a bear tape (3 out of 4 stocks follow general trend) CMED failed. That tells you just how bad this market is.

    ALOHA Author! Great post

  5. Gio on March 4th, 2008 6:41 am

    Hey, great post. You forgot to tell us when or if you would get back in CMED.

    -gio

  6. Author_Ego on March 4th, 2008 11:40 am

    Thank you all for the feedback. Much obliged. Now, would I get back into CMED? You bet. When? Well, conditions would need to be right. One, the market would have to be healthy and either already in a strong uptrend or have just had a powerful follow through day -and I mean “powerful,“ not like the sorry excuse of a FTD we got on 2/13; and, two, assuming CMED’s fundamentals were still excellent, the stock would need to break out of a proper base on pretty convincing volume. I didn’t forget to mention it, gio, it’s just that we are so far away from all of this that it seemed moot.

    Thanks again for the comments….

  7. rod on March 20th, 2008 10:14 pm

    This article was written by Richard M. Salsman, a purveyor of Objectivist dogma, who on March 19 2007 published this piece of investment wisdom: ” Even as U.S. “sub-prime” mortgage lenders suffer setbacks, fixed-income investors in the U.S. should take advantage of the growing hysteria over the debacle and buy mortgage-backed securities.” Whether you are an informed Objectivist or not, dogma is never wisdom.

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