Expensive lessons learned

The first two months of 2011 have been tortuous for my portfolio. I got hit with a 3.37% loss in January and in February so far, I am nursing a 1.87% loss to date.

However, going through the blogs of other investors, I was floored reading that some are already suffering more than 10% or 20% losses year to date. Even Gus Cosio, an investment guru whose blog www.guscosio.wordpress.com I closely follow says in one entry that he was nursing around 7% losses on his portfolio already this year.

I guess I’m doing just a little better than many investors then. Small consolation though since a loss is still a loss. It would have been much worse though if I did not learn from all this. As we Pinoys like to say: “charge it to experience.” That I will do.

Here are a few of my expensive lessons learned as I struggled to survive in this market being sold down by the foreign funds:

Cut losses systematically
When the market gets choppy, like it has gotten lately for the PSE, cut your losses quickly. Review your trades and tighten cutloss levels. Getting out quickly when cutloss levels are touched is critical to protecting your capital. This has proven painfully difficult when just days earlier, the same stocks I had to cut had been enjoying modest gains. To sell at a loss does mean locking in exactly that – losses. But to not do so exposes your trading capital to huge risks. Protect it by all means. You cannot trade without capital. Now is not the time to fall in love with your stocks. If it drops below support and hits your preset cutloss price, own up to the failed trade and cut quickly.

Be technical
I believe in buying stocks for their fundamentals. But in choppy markets, it makes sense to pay more attention to what the charts are saying. Fundamentals may win out in the end but you should never discount market dynamics. Clearly down-trending stocks should be avoided. If you don’t want to exit the market totally, at least buy stocks with their bullish trends still intact. Surprisingly, in this market, there still are stocks that fit the bill. SCC is one. NIKL is another.

Lighten up
One of the best nuggets of wisdom I learned from my technical analysis teacher, Danny Go, was that “cash is a position.” Nobody is forcing you to trade. Just because you have capital doesn’t mean it has to always stay invested. When too many successive trades break down, the market is telling you something. When stocks are moving sideways, stay away and stay liquid. Raise cash even. The sentiment will change, that is a given but be patient. When the time is right, you’ll be glad you have cash to buy back into bargains.

Stay unemotional
Don’t be pressured by your losses into buying into losing trades just because you want to win back what you lost. Stay unemotional and concentrate on finding and playing the intelligent trades. Losses are all part of the dynamics of trading. Learn to deal with it. Don’t let it cloud your better judgment.