Melanie wrote:Regarding stop-losses, how do you personally deal with individual shares diving? We've not set up any automatic stop-losses, but we've merely made a note of the price at which a share will have dropped by 20%, in order that we would then look into why it was falling, and then decide if we still wanted to hold or keep a closer eye on it.
What would you do if one of your shares fell by 35 - 40% for example?
Have read The Art Of Execution......this suggests that an assassin approach would be to sell when shares are falling anywhere between 20 - 33%. We appreciate that this approach might be better suited to traders rather than long-term investors, but surely there must be a cut-off point at which to get rid and invest the money elsewhere in shares that are performing better?
For me, it depends not only on how much the share has dived, but also how much whatever news has caused the dive affects my assessment of the company's prospects. E.g. if the shares have dived 40% but I reckon its prospects have dived 70%, then my assessment of its value is down to 30% of what it was and its price down to 60% of what it was, so I'll assess it as offering 30%/60% = 0.5 times as good value for money as it used to, which (unless my original assessment of its value for money was amazingly high) will mean that I expect to do better by selling and redeploying the money elsewhere. If on the other hand they've dived the same 40% and I reckon its prospects have dived only 25%, the same calculation says that I now assess it as offering 75%/60% = 1.25 times as good value for money as it used to, so it would be silly to sell and buy elsewhere, and it might even result in my selling something else to buy more of the share that has dived. So a 40% drop could result in my decision being anything from a highly likely sale to a very definite hold and possible top-up.
So basically, my answer to your "What would you do if..." question is look for the reasons for the fall, then reassess the share in the light of those reasons (or of my failure to find them), then decide what to do as a result of the reassessment. What I won't do is reckon that although I haven't found reasons, they must be there anyway and so I'd better sell. Basically, I want to run my own portfolio, not have other people run it for me - and in the absence of any other identifiable reason, selling because the price has dived is effectively selling because lots of other people are selling. Yes, that will occasionally be a mistake because there is a good reason for the selling but I've missed it; equally, doing the opposite will occasionally be a mistake because I've allowed myself to be panicked out of an excellent share by what other people are doing... My current largest holding is such a share - a very rough account of the holding history is: I originally bought it in 2006, then it doubled in price from my original buying price for about a year, then it dived by about 5/6ths for about another year (so down to about 1/3rd of my original purchase price). I decided to top it up, and it's since been up to nearly 6 times my original purchase price. There were also some top-ups during the initial doubling, and as a result the average purchase price of all those early purchases is slightly below my initial purchase price. So basically, if I'd sold during the dive, I might have lost half my expenditure on those early purchases, and by not doing so, I've instead gained about 5 times it. So in the case of that particular holding, not making the mistake of selling because the price has dived has gained me about 10 times as much as making the mistake of not doing so would have done if things had turned out differently.
I should say that that's a pretty extreme example of how bad a mistake selling because the price has dived can be, and the most spectacular one in my personal experience. But I have encountered a fair number of others - enough that I'm reasonably convinced that a policy of selling because the price has dived
when I cannot identify any sufficiently good other reasons for selling is of little or negative value. Also, in view of the fact that I normally post mainly about HYPs, I should add that the share concerned is a smallcap and definitely not a HYP share. And possibly also that that the account above only takes the story up to about 2014 - since then, the share has oscillated quite a lot in price (down to about twice my original purchase price, up to nearly 6 times it, and currently on about 4.4 times it) and I've done some top-slices and top-ups that amount to some profitable medium-term trading in the share. The net result of all that is that I've so far had about 1.5 times as much total cash out of the holding (as dividends and sale proceeds) as I've put into it (for purchases), and it's still my biggest holding...
Finally, an important warning: hanging on to a diving share
does involve highly-variable outcomes, with both further falls and a failure to recover from them and subsequent multi-bagging being considerably more likely than for a share that is behaving itself. I.e. it carries much higher risk, and so should only be done if you can take that risk in your stride. I can - but I generally keep the amount of original capital I put into any one holding down to a fairly small percentage of my total original capital. That includes
not allowing myself to be tempted into topping up a share that has dived to have had too much original capital invested in it in total, even if my reassessment of it says that it's better value than ever. Basically, one of the biggest risks I must accept from my decision to run my own portfolio is that I might be wrong, and the main way to mitigate that risk is not to put too much of the money I have available for investment at risk of my assessments of one share being wrong...
Gengulphus
