When to fold a stock position
DEN SOMERA
Right at the start of the Virtual Stock Trading Challenge, all of the players showed some capabilities to make decisions.
For instance, the game’s youngest player, who was just starting to learn how to invest in the stock market, surprisingly displayed a good degree of facility in decision-making. He was immediately able to come up with eight trading orders on the first day of the contest to jumpstart his investment game plan.
The trading orders were not just ones caught from the air. They were no doubt the result of deliberate and systematic decision making. His trading orders bore the mark of a well-planned investment.
First, he filled his investment basket with safe, sound and solid stocks from the big board. Second, they were carefully selected on the basis of their strategic potential to profit from the government’s economic development agenda.
Some of these development initiatives were the government’s “Build, Build, Build” infra program, the authorization of a third telco player intended to break the current duopoly that is blamed for the high cost and low level of efficiency of internet services in the country, and the prospects of imposing higher interest rates to counter inflation arising from the impact of the TRAIN law and similar developments in the US.
Likewise, his investment portfolio revealed much of what kind of investor he is. He is light on speculative stocks but heavy on financially sound companies with more prospects for growth at the same time paying stable or rising dividends.
Among his holdings were Ayala Land, Inc. (ALI), SM Prime Holdings, Inc. (SMPH); SM Investments Corporation (SM), Metropolitan Bank & Trust Company (MBT), Eagle Cement Corporation (EAGLE), and construction and steel fabrication outfit EEI Corporation (EEI).
On the other hand, while the oldest player in the contest understandably took his time to make his first investing move after one week of the game, he certainly showed decisiveness, as well.
His investment plan consisted of combining the speculative flair of an oil exploration stock and a riskless blue chip with a long record of regular dividend payments.
He divided equally his money to ride on the speculative but highly financially rewarding character of oil exploration in PXP Energy Corporation (PXP) and investment on the stable and profitable water distributing business in Manila Water Company, Inc. (MWC). The weakness of a two-stock investment portfolio later proved to be an ineffective investment plan. The two pulled down each other’s gains most of the time.
Decisive like the others was our contestant from the banking industry. On the first day of trading, he had six trading orders for execution. It consisted of five stocks only. The sixth trading order was actually for the same kind of stock to be bought at a lower price — move to average down should the market goes against his trade.
Like our youngest player, he was a blue-chip investor. He chose his stock picks on the basis of their relevance in the country’s economic progress. For instance, he picked up one from the property counter heavy on the remunerative low to medium cost development projects. Another was in a holdings company whose investment interests are strategic engines of growth for the country. The last was a stake in energy generation — an industry that thrives in both good and bad times.
This paid off. His stock picks stood more resilient against the onslaught of selloffs from both local and foreign investors. To mention a few, these were SM Prime Holdings, Inc. (SMPH), JG Summit Holdings, Inc. (JGS), and First Gen Corporation (FGEN).
With the strategy to stick to blue chips, our banker ended second runner up in the contest. His lack of turnover in a prolonged declining market (as previously pointed in an earlier article) prevented him from carding a better investment score in the contest.
The only businessman in the contest also displayed decisiveness in his entry in the market. What did him, however, was his apparent propensity for speculative stocks, lack of turnover, and difficulty in deciding when to fold a stock position.
Bottom line spin
In fairness, the participants in the contest really did have some degree of facility in decision-making. They have no problem committing themselves as they did when they entered the market.
However, most showed lack of skill in deciding when to sell and when to fold a position. Even the champion in the game wasn’t exactly exempt from this weakness.
This seems to be the usual weakness most of us suffer in stock investing. This is probably because it is only when we sell that we make or lose money in a trade. This act required more amount of judgment than anything else.
Judgment, however, is oftentimes undermined by emotion. This is why the general advice is to better employ mechanical measures like the use of protective stops.
Nonetheless, maintaining so many stops might not be entirely wise, as well. It might be too defensive that you will miss the potential profits you should have earned.
Market legends offer the following guiding principle: Apply protective stops in a way consistent with the market’s golden rule to “cut your losses short and let your profits run!”
In folding a losing position, on the other hand, their guiding principle is simply to “protect capital.”
We’ll talk more about this subject in the next article when we take another look at the use and importance of the “Recovery Table.”
Den Somera is a licensed stockbroker. The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise. Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity. E-mail address of the writer is den.somera@manilatimes.net
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