If you followed the 11ish approach in good bankroll management, you’ve probably invested an amount that protects your bankroll if shit hits the fan but also big enough where the gains are interesting. It’s inevitable that sometimes you didn’t time it right or ended up choosing some shitters. When that happens, what do you do next?
In this article, we’re going to talk about exactly that. Should you sell to cut your losses, average down, or do absolutely nothing.
if you’re invested with the 11ish approach in stock picking, then there was most likely a very good reason for why you chose these stock picks in the first place. You have a reasonably sound hypothesis about the business you invested in, its growth opportunity, and its time scale. And so if the stock has gone down enough for you to be concerned, then you should reexamine your investment in the following order to figure out what your next step should be.
The first is macroeconomics. Look at the entire stock market and take account of general trends. If you’re trading in a frothy market and is investing at the tip of the bubble, you have to ask yourself is the market about to turn and if it does are you ok with holding through. Because assuming you aren’t investing in fads, the business you’ve picked will eventually come back. For me, even though I know my investments will come back, I’d rather miss out on some upsides, minimize my risk, and buy on the low so I have a pretty large chunk of my bankroll sitting as cash for this exact reason.
#2 Validate False Assumptions
Second checkpoint: read up on recent news for the company and industry of the company you’ve invested in. Find out of if the competition has recently made advancements or released earnings that were out of the ordinary, indicating that your investment isn’t as good as you thought. If you find out that is the case, you invested in false pretenses and will probably be better off cutting your losses or at the very least adjust your investment to less.
#3 Handling regular Volatility
If the company you’ve invested in looks fine and the industry looks fine, and the risk of the macroeconomics is acceptable to you, and the stock went down ANYWAY, then it’s likely that what you’re going through right now is regular volatility; no stock will go up in a straight line, because that’s not how supply and demand works.
Should you average down
At this point, you should ask yourself the following 2 questions. At the current stock price, where you’re currently losing money at. 1) If you didn’t have ANY money in this company right now, would you invest at this current price. 2) if you did put more money into this stock, what percentage of your bankroll will this investment represent. Make sure you don’t break the rules you’ve set for yourself to protect your bankroll because that’s priority number 1.
Every Investment is Like Poker
Any serious poker player will tell you, even if you were dealt a pair of aces, just because you have a higher probability of winning, you should not go all in with your entire bankroll. That’s why when you sit down at a poker table, you’re playing with a part of your bankroll so that you can absorb the natural ups and downs of investment probabilities.
And I can’t emphasize enough that this is the primary reason why you shouldn’t invest in companies where you have no idea what they do. If you only invest in companies where your friends have told you it’s a good investment, all you CAN do is go to your friend and ask them hey… should I hold or sell, and the fact that it went down in the first place will make you stressed and resentful of your friend!