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I occasionally get small cuts on my hand, other times on my foot, and I usually have no idea how I got them. These cuts bleed a little but I do not really pay any attention to them because they always recover fast enough. As we learned in biology, our body has a magical blood clotting process to stop the cuts from bleeding further. Thereafter, our body dissolves these blood clots once the cuts are completely healed.
When clots are not dissolved naturally, however, it can block your arteries and bring serious danger. A blood clot in the heart may lead to a heart attack and a blood clot in the brain area may lead to a stroke.
Similarly, having a ‘blood clot’ in your stock portfolio carries an imminent degree of risk. If ignored, you could lose their hard-earned money in the stock market.
Here are three signs your portfolio could lose you money:
1. You have a celebrity-like portfolio
A celebrity-like portfolio simply means that you are buying the same stocks the ‘guru’ investors like Warren Buffett, George Soros, Seth Klarman, Edward Lampert, Jean-Marie Evillard (or any other investment idol you may have) are buying.
What could possibly go wrong, right? These guys are the best in the business and surely they pick the right stocks nine times out of ten.
It’s true that these renowned investors make lots of money from their stock picks. But you may not be aware that they possess intangible qualities like emotional stability and patience that may not be as easily copied.
For instance, Buffett accumulated Walmart stock back in 2005 at prices below $50. For three years after, Walmart’s stock traded sideways. Imagine holding a stock for three years with no returns at all. That would turn most investors off, except Warren Buffett.
Buffett held Walmart for more than 10 years before cutting loose. But how long can you wait? You may have drastically different investment time horizon from Warren Buffett. He may have a 30-year time horizon for a stock, while you might have a five-year one.
So while you might be able to copy his portfolio, you wouldn’t know what his expectations are for each individual investment.
In short, every investor has different risk appetites, the expectation of returns, and time horizons, which is why portfolios can’t all be easily duplicated.
2. You’re a ‘stockoholic’
There was one time I saw a lady with her list of investments and the number of stocks she had shocked me. The list was as long as the number of items on my credit card bill except that each item (stocks) amounted to at least a three, four or five-figure sum.
How on earth did she end up with so many stocks? You probably wouldn’t believe it but she told me that whenever she had excess cash, she would buy a stock she liked or if someone recommend one to her.
The late Steve Jobs once said:
“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully.”
I can’t agree more with Steve Jobs because this also applies to investing. A ‘stockoholic’ is likely to encounter several issues:
- It is laborious to monitor so many stocks that its defeats the purpose of investing being a near-passive source of income.
- The amount of brokerage fees incurred is high and will hamper your overall returns. Unless you have at least an eight-figure asset base like a full-time fund manager, it is not going to make sense investing in so many stocks.
- We diversify to reduce risk. However up to a certain point, over-diversifying doesn’t reduce risk anymore at all. Even if one invests in the whole universe of stocks out there, your portfolio is still subjected to the volatility of the overall stock market.
3. You’re unwilling to cut your losses
Do you find yourself having ‘junk’ stocks in your portfolio you’re unwilling to cut losses on? I know a friend who bought a stock called Digiland that traded as high as $30 in 2007. She held on fast for seven years refusing to realise her losses as the stock came crashing down. I’m not sure if she’s holding it today but Digiland is now worth 26 cents a share.
When mistakes are made, we always hope that the tide will change and one day the stock will climb upwards again. From my experience, though, it doesn’t work that way. There’s a reason why a stock is depressed for a long time and, chances are, it will continue to stay that way. If you continue to hold on, you are losing the opportunity to make your money back – faster!
In 2012, I invested in a shipping company called Courage Marine. At that time, the shipping industry was far outside my circle of competence. After I realized I made a mistake with Courage Marine, I regretfully cashed out at a 30% loss. I then reinvested what I got into another stock that made me 17% in profit instead.
My losses would be far greater today if I continued to hold onto my mistake in Courage Marine. Instead, I learnt from it, cut my losses, and used the proceeds to purchase a better stock.
The key lesson here is: Don’t compound your losses, but compound your winners!
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