Cut Your Losses Short, Let Your Profit Run

When to take profit? Never (If you know what you are doing)

This is the continuation of our previous blog post titled “Why You Are Still Losing Money in the Stock Market” .

This is also the author’s answer to a common question from our clients: when to take profit?

The Holy Grail of Investing

Just like we mentioned in the previous blog post, to be successful in investing is really simple (but very difficult to implement), you “just” need to make sure that your portfolio value is consistently growing overtime.

Portfolio growth of the oldest Recompound customer. Of course, newer customers will have returns less than this. Past performance does not guarantee future performance.

To achieve this, in the author’s opinion people need to apply this principle:

Cut Your Losses Short, Let Your Profit Run

What do we mean by this:

• Keep holding your profitable stocks (never sell if there is no good reason to)

• Cut your losing / non-prospective stock as soon as possible

Sounds simple, but very hard to implement. But seriously, this is how someone like Warren Buffet and Charlie Munger get rich in the stock market.

For example, Buffett’s Berkshire Hathaway has been holding Coca Cola (ticker code KO) since late 1980s. Why is this? Simply because the company has been distributing dividends which are growing every year.

How to Apply this Principle?

To implement this principle, you need to have:

1. Good raw investing skills (fundamental analysis, technical analysis)

2. Good understanding the future prospect of the company you are investing in

   1. For example, coal stock can have a super low P/E ratio (< 5) but their future earnings can get lower because of lower coal price

3. Extensive experience

   1. Just like any other fields, you cannot discount raw experience

4. Applying the elements in 1, 2 and 3 with discipline and consistency

This is why in our previous blog post “Why You Are Still Losing Money in the Stock Market”, trading & investing is a full time job all by itself.

The Acute Problem We See in the Retail Investing Space

In reality, majority of retail investors we encounter usually have portfolios like this:

This kind of portfolio is the exact opposite of the principle we mentioned above, which is:

Cut Your Profit Short, Let Your Losses Run

How is this Possible?

Pretty simple:

• Keep holding losing stocks, having “hope” that one day the stock price will go back up, although there is no fundamental reason to back that “hope” up

• Taking profits from excellent stocks too early. Although if you do a proper analysis, you are pretty sure your profit from the stocks can go up to 100% and beyond

2023: No More COVID-19 Pandemic and Work From Office (WFO)

This is exacerbated by the fact that many are going back to Work from Office (WFO) mode. This means that people will have even less time to perform due diligence and monitoring of the stocks you own. All that extra time is consumed for commuting to the office and then attending back to back meetings.

What the Pros Say

Don’t trust what we have said so far? Here are some deep & meaningful quotes from the pros themselves, Warren Buffet and our anonymous stock market mentor.

Quote 1:

What this quote means:

When you sell your fundamentally excellent stocks too early (5 - 10%), you are basically “transferring” your wealth to other people who are long term holders of the excellent stock.

We think that being more patient in holding a winning stock (with excellent fundamentals) is an effective winning strategy to compound wealth overtime.

Quote 2:

To close this post, here is another beautiful quote from our anonymous stock market mentor:

Kalau saham kamu lagi naik, jangan mikir turun.

Kalau saham kamu lagi turun, jangan mikir naik.

Semua saham ada masanya tersendiri.

Jangan pernah melawan market.

This directly translates to when the stock is going up, don’t think that it is going down. When the stock is going down don’t think that the stock is going up. Everything has its time and place. Don’t try to fight the market because the market is always right.

Yes, whether you are a CEO or an entrepreneur or even a huge organization with thousands of employees, you should not fight the market because the market is always right. It does not care who you are, really.