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Should you sell or hold onto your stocks? How to get out of the dilemma

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The market volatility is causing hormonal rage among traders and investors. The market movements are evoking strong emotions in us. We can’t help it. We are humans.

Some are more decisive of what to do while others are still stuck in a dilemma, alternating between selling or holding on to their stocks, or even to buy more.

Maybe you are one of those who hasn’t decide. And it isn’t your fault because you get very contradicting ideas from different people. Essentially it depends on whether you got the advice from an investor or trader. An investor will advise you not to act like a trader and vice versa. They are born in different planets and you have to decide which planet you would like to live in. I will present some of these contradicting views before reconciling them for you in this article.

Should you sell your stocks?

YesNo
If I have positions going against me, I get right out; if they are going for me, I keep them… Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in.

~ Paul Tudor Jones
People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.

~ Peter Lynch
When I get hurt in the market, I get the hell out. It doesn’t matter at all where the market is trading. I just get out, because I believe that once you’re hurt in the market, your decisions are going to be far less objective than they are when you’re doing well… If you stick around when the market is severely against you, sooner or later they are going to carry you out.

~ Randy McKay
When you sell in desperation, you always sell cheap.

~ Peter Lynch

Should you keep your best stocks?

YesNo
All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.

~ Warren Buffett
My philosophy is that all stocks are bad. There are no good stocks unless they go up in price. If they go down instead, you have to cut your losses fast… Letting losses run is the most serious mistake made by most investors.

~ William O’Neil
The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.

~ Peter Lynch
Dramatic and emotional trading experiences tend to be negative. Pride is a great banana peel, as are hope, fear, and greed. My biggest slip-ups occurred shortly after I got emotionally involved with positions.

~ Ed Seykota

Should you buy more as the market goes down?

YesNo
This does not bother Charlie [Munger] and me. Indeed, we enjoy such price declines if we have funds available to increase our positions.

~ Warren Buffett
Don’t ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well.

~ Paul Tudor Jones
The best chance to deploy capital is when things are going down.

~ Warren Buffett
What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.

~ William O’Neil
Widespread fear is your friend as an investor because it serves up bargain purchases.

~ Warren Buffett
One evening, while having dinner with a fundamentalist, I accidentally knocked a sharp knife off the edge of the table. He watched the knife twirl through the air, as it came to rest with the pointed end sticking into his shoe. “Why didn’t you move your foot?” I exclaimed. “I was waiting for it to come back up,” he replied.

~ Ed Seykota

Should you take big positions

YesNo
Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.

~ Warren Buffett
I’ll keep reducing my trading size as long as I’m losing… My money management techniques are extremely conservative. I never risk anything approaching the total amount of money in my account, let alone my total funds.”

~ Randy McKay
Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. As far as Soros is concerned, when you’re right on something, you can’t own enough. 

~ Stanley Druckenmiller
Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical.

~ Larry Hite
It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.

~ George Soros
There are old traders and there are bold traders, but there are very few old, bold traders.

~ Ed Seykota

Traders and investors do share a common view

As you can see, both the investing and trading camps can be rather convincing. No wonder you are confused!

But they do agree on one thing, that is, it is important to stay steady when the market is unsteady.

They’re gonna happen. When they’re gonna start, no one knows. If you’re not ready for that, you shouldn’t be in the stock market. I mean the stomach is the key organ here. It’s not the brain. Do you have the stomach for these kinds of declines?

Peter Lynch

Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing.

Warren Buffett

The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading.

Victor Sperandeo

I haven’t seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren’t. Many outstanding intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.

William Eckhardt

Now let’s reconcile their opposing viewpoints. What are the contexts that caused them to have such beliefs? There are 2 key differences.

#1 Leverage

Traders usually take on leverage often. This is due to the products they trade. Futures, options, CFDs etc are products with leverage in-built in them. Leverage is a double-edged sword. You can make more money faster but you can also go bust easily. If you take 5x leverage, your account would bust when your positions go down by 20%. Hence, traders are very focused on limiting their downsides to protect their capital. Bigger losses also mean they need much bigger wins to get back to where they were.

Portfolio LossGains to recover the loss
-10%+11%
-20%+25%
-30%+43%
-40%+67%
-50%+100%

Investors on the other hand do not take leverage often. Hence they can have the runway to hold onto losses which they deem are temporary, without the need to sell their high conviction fundamentally strong stocks. But of course, some investors lack that conviction because they didn’t do enough homework to justify the buys. Now they panic if they have made the wrong choice.

Only when the tide goes out do you discover who’s been swimming naked.

Warren Buffett

Although Buffett was referring to those who had taken reckless leverage, I think it is apt for those who had frivolously picked stocks in the past. It is easy to pick a stock that rise during a bull market. They can get away with it until the market start crashing and the doubt surfaces.

#2 Timeframe and degree of certainty

There’s a higher certainty that the stock market will be up in the long run.

In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

Warren Buffett

The chart below shows that the longer you hold, the more likely you end up with a positive returns. In the past 68 years, if you have held the stocks represented by S&P 500 index for 20 years, you were guaranteed to have made money at 6-17% annual returns.

But a trader usually open and close a trade within a year, months or even a day. As you know the shorter the timeframe, the certainty of wins drops significantly. Hence traders are often more wrong than right with their short term trades and they have to cut their losses in a very disciplined manner.

Traders and investors have different viewpoints because their contexts drove them to operate differently. There’s no right or wrong. It all depends on the context.

Are you a trader or an investor

The dilemma arises because you don’t want to or cannot decide who you are. There are times where investors do better than traders and vice versa. You want the best of both worlds and hence you alternate between the two roles which is detrimental. I have observed many investors become traders at times and vice versa.

If you are a trader, you have committed stupidity when you didn’t want to cut losses. You comfort yourself and say you are a long term investor. That’s how traders get killed.

If you are an investor, you have committed stupidity when you sell your good stocks out of fear. You comfort yourself by saying you will buy back later. You rarely do. That’s how investors get poor results because they buy high and sell low.

You need to decide who you are – a trader or an investor. Commit to that role once you have decided. If you know who you are, you know what to do.

5 thoughts on “Should you sell or hold onto your stocks? How to get out of the dilemma”

  1. This post shall certainly clear the murky waters on should you hold or cut loss. Before even asking that question, ask yourself, are you a trader on leverage or an investor looking for opportunities?

    Reply
  2. Dear Sir
    Good day
    Thanks for your good sharing of whether you are a Trader or Investor.
    Yes, i am confused, i am an investor but i have bought a mixed portfolio of SGX shares…some shares considered as Blue Chips like: DBS, OCBC, Thai Beverage..
    however i have also not so good shares like: suspended shares, like: Noble:
    Hyflux: Ayondo: Oil related shares, like: Semb Corp Marine: Keppel Corp
    I have been holding these shares and more for more than 20 years till today.
    However, due to this unfortunate and unprecedented times of covid19, my total shares holdings have lost 20%

    My million dollars question to you is that:
    Should I sell ALL my shares NOW or select certain shares to sell?

    Please share your professional views and advice
    Thank you so much
    Michael
    22 March 2020

    Reply
    • Every investor has a fair share of losses and must be able to handle the bad times as much as the good times. What’s your strategy or thought process when you buy them? At what conditions do you sell them? If you don’t have an investment process to guide you on entries and exits, the problem will keep surfacing. So I feel the more important question is what is your buy and sell criteria? if you don’t have one, you might want to think about it. Without which, I think you should not be buying stocks.

      Reply
  3. Dear Alvin,
    Thanks for the information. I’m new to investing & had bought a few reits the last 2 weeks. I’m sure I want to take the investor position as I’m too lazy to monitor the counters on a daily basis. I’m still looking to pick up some more good value stocks. My question is :
    – when you set a sell criteria of say a gain of 100% in 5-8 years; do you sell off once the stock hit 100% even before the 5 year period?
    – can you provide some insights into what are some of the buy & sell criteria for someone investing for retirement in 10-12 years time?
    Appreciate your kind advice.
    Amanda

    Reply
    • – when you set a sell criteria of say a gain of 100% in 5-8 years; do you sell off once the stock hit 100% even before the 5 year period?
      -> Yes

      – can you provide some insights into what are some of the buy & sell criteria for someone investing for retirement in 10-12 years time?
      -> this question is too wide. It really depends on your preference. For example, the way you go for value stocks would be different from the way you go for growth. Dividend investing is also another ball game. Their criteria are all different.

      Reply

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