Do NOT double down on a stock

Discussion in 'TIFU' started by Gray Wolf, Apr 26, 2016.

  1. Gray Wolf

    Gray Wolf Well-Known Member

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    Time for me to post about my nemesis. I have learned the hard way 3 times (shame on me) to not double down on a stock you own because it is falling. I just finally sold out of my last position in ARLP and ate my loss. Didn't taste good. My justification for doing this is I bought them as a dividend stock and they fit my rules of steady dividend increases for over 5 years. When they dropped, I justified by figuring I'd improve my yield and bring cost basis down by buying more. In all cases I've been wrong especially with ARLP. I did not evaluate the stock properly as it was dropping or I would have realized that the fundamentals were changing and contributing to the loss, not just a pull back in the S&P. I will not make this mistake again.

    I've been fortunate enough that through diversification and a few good choices to offset the bad ones I have been able to avoid a portfolio damaging hit. But all I've managed to do over the past few years is tread water with my overall portfolio.
     
  2. StockJock-e

    StockJock-e Brew Master
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    I see what you mean..

    When you see a divi of 18% its either an accidental high yielder (stocks that got smacked down for no good reason), or something has gone wrong and there is risk in holding long!

    This is a great lesson in no getting married to a stock, it can never love you back!
     
  3. Gray Wolf

    Gray Wolf Well-Known Member

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    No matter how much you learn, this stuff can get very frustrating when things do the opposite of what you have learned. I closed out of ARLP this morning because they announced a miss in earnings by 22% and announced a dividend cut from 63 cents to 43 cents after 13 years of raising dividends once a year. They were down in pre-market and opened down. I knew that the conference call was in an hour and figured it would get worse after the call so I followed my rule to sell on a dividend cut so I bailed at 14.50. Then the call happens and the stock goes up to 15.30. I've had other stocks give positive earnings surprises and go down sharply after conference calls. I just can not wrap my brain around the various market's reaction to earnings. :confused:
     
  4. StockJock-e

    StockJock-e Brew Master
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    Often stocks will do the opposite of what is obvious.

    Lets take AAPL for example which is reporting later today.

    Its been telegraphed that this will be the first earnings showing weakening demand since 2007.

    Does that mean the stock drops after earnings?

    The opposite if probably going to happen, everybody that wanted out already got out.
     
  5. Tiptopptrader

    Tiptopptrader Well-Known Member

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    That is the strategy that George used on Seinfeld but not on stocks. I used to do that in the workplace years back on Monday night football. I went against the consensus among everyone and I the results were amazing.
     
    #5 Tiptopptrader, Apr 26, 2016
    Last edited: Apr 26, 2016
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  6. StockJock-e

    StockJock-e Brew Master
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    Ah yes, the Costanza strategy.

    We should actually make an official write up on that.
     
  7. surfsup

    surfsup Active Member

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    I'm of the opinion this can be a good thing and a bad thing. Sometimes it works in your favor. I was short UAL and went on vacation. It ran on me. I was down pretty big. At that point I just decided to hold because I thought my initial decision was the correct one but timing was off, or the latest run in SPX was a bull fake, etc call it what you will. I reshorted it once more doubling down but it moved a bit higher (but not much, about 5%) when I doubled down AGAIN. Well, I just closed it on the open for a very nice gain as UAL has been tanking. I probably should have held it a bit longer but because I was down $5k at one point, I was happy to see it green and just took the $600 profit.

    On another note, I was burned on a stock I was married to. A fundamental play that cost me thousands, many thousands. I learned that lesson many years ago. Never again!

    Never buy a stock that is thinly traded.
    Never buy "founder's shares"
    Never buy a no-name stock - on the hopes it will be huge one day

    Those methods are the same as the lottery. I'd rather spend the dollar on a lotto ticket at this point.
     
  8. Gray Wolf

    Gray Wolf Well-Known Member

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    @surfsup I'm glad that worked out for you. In that past for me, doubling down has not been good. The key part to my original post is that I failed to re-evaluate the fundamentals that caused me to buy the stock in the first place. Had I done that I would have seen that earnings and revenue had started to slip and forward earnings were being revised downward. They looked fine when I bought them but not when I added to the position. Volume/Liquidity was not a problem and I never deal in "no name" stocks. Most of these stocks that I did this with will eventually come back. Problem is that it ties up a larger percentage of my portfolio when I chase the price down on a stock that will take time to come back and leaving me with nothing to invest at the bottom of a market pullback. It also is breaking my trading rules in position sizing thus increasing my risk as well as breaking my rules on when to exit and enter a position. That's what I am learning from what I consider to be a bad practice now.
     
  9. surfsup

    surfsup Active Member

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    UAL, rats...down another two points aizah! Oh well. Glad I got out green but would have loved the extra money.
     
  10. surfsup

    surfsup Active Member

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    Those three rules were meant for anyone reading, just to clear that up. Just a few trading commandments I won't violate after having learned a costly lesson.

    Agreed and good point, especially on the long side. The pain on the short side can be bigger, and should be mentioned. In my case I should clarify that I felt the markets were/are entering/in a bear market and the trend is down. The risk I took is immense since a bad short sale can have, theoretically, infinite losses (stock keeps going up up up) vs a long double down that has losses that are maximized at your position size. I was just very confident in my case as well as rising oil prices will hurt airlines, slowdown will cause travel freezes (we are already asked to minimize travel), etc.

    I shorted TSS at $51 for example and my stop was triggered, I thought looking at it, geez what a perfect example of the MMs taking out short cover positions and it will tank right after. But, since I was into a huge position on UAL I opted to not reopen TSS higher ($54.5 was my price looking at the top and shelf) after that small stop loss. So it affected my portfolio as well.
     
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  11. Gray Wolf

    Gray Wolf Well-Known Member

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    You do touch on something that is very important and that is to understand your risk profile and apparently you do. Risky moves are in no way foolish if you enter into it with the understanding of what that risk is. Then managing that risk through position sizing and entry/exit rules makes sense regardless of risk tolerance. Higher risk = higher rewards as well as higher potential loss but if one can absorb a bad outcome. I suspect my risk profile is much lower than yours :D
     
  12. IchiFutures

    IchiFutures Active Member

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    "Never add to a loser" PTJ
     
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  13. Ciao (Sheppy)

    Ciao (Sheppy) Well-Known Member

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    I don't add down .. I prefer to sale (SL) then buy it/them cheaper :)
    if ever I get stuck with profit I write them of (on my account) then I have green instead of red psychologically I feel better JMHO ;)
     
  14. Tiptopptrader

    Tiptopptrader Well-Known Member

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    Treat the stock as you never owned it and kick the tires and see if it worth a buy. If it is not worth a buy there are many other stocks to put your money down on. If you are not diversified in your portfolio it may be the best thing to put your money elsewhere.

    Trade smart and prosper
     
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  15. Zaysev

    Zaysev Member

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    Yes, that's one of the first mistakes I've made - getting too attached to the stock, trying to squeeze the maximum of it, resulting only in quite predictable (now I see it) loss.
     
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  16. SomeDudeAtHome

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    I'm actually running into this problem right now with SCTY and I'm at a real crossroads. Should I buy in with how low it's gone and hope that it rebounds nicely or just wait it out? I should've sold about a week ago but decided not to and now I'm kicking myself.
     
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  17. Gray Wolf

    Gray Wolf Well-Known Member

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    No one can really tell you what to do with your money because you alone are responsible for the end result. The only thing I can tell you is that my experience has not been good with adding to a losing position. In this case, SCTY just had a negative surprise on earnings missing by almost 10 percent. Add to that the earnings are negative earnings anyway and projected to remain negative for the next 2 years and a lot of debt on the balance sheet (they can't pay of current liabilities with current assets) so any recovery or getting on solid ground is a real roll of the dice. You would probably better serve your portfolio by getting out and not adding to it and put that money into a better stock with more potential upside.
     
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  18. Zaysev

    Zaysev Member

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    I totally agree with Jerry, both on taking responsibilities for your money and on SCTY specifically. Generally speaking, if you keep holding in this situation, you either lose more or lose less/earn a bit. Whereas if you sell it you lose a bit while having opportunity to earn more (with a new successful stock) or lose a bit (whith a new unsuccessful stock). So holding a losing stock makes basically no sense in most cases. I suggest you to read some basics on Game Theory, really helps figuring out what to do in such complicated choices.
     
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  19. Ciao (Sheppy)

    Ciao (Sheppy) Well-Known Member

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    Hi SDat Home ...
    I agree with what the other before me told you but although you don't say what type of trade you are (plan, strategy etc..)
    I like to just add this:
    One of the top trading secrets is money management. All traders have heard of it and some may think they actually know it. But how many traders practice sound money management?
    Most traders lose money because they lack money management, do not have enough knowledge of the market they trade, do not have a sound trading methodology, and trades a market that does not fit their style. so find what suit you best

    Getting the proper entry is a major part of becoming a successful trader. Big loss's lead to emotional trading, which in term leads to more loss's. With the proper entry that offers you a good risk vs reward ratio you can minimize your risk while allowing the best possible reward. You should never lose more than 2% of your total capital on any single trade. Following these two simple rules will allow you to define your risk as a trader and allow you to remove the emotional stress that trading can force on to you. IMO the psychology play an important part in our mind while trading
    then work on it improves the inefficiencies +there are always tweaks/improvement to do and so on... until the profit begin to arrive....
    I am still improving mine after many years of trading ;):D
    I haven't found the Holly Grail yet but work on it :D:D
    take care and good luck
    (sorry if I said what you already know but IMHO, a brief refresher has never hurt anyone)


    ..
     
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  20. SomeDudeAtHome

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    Thanks everyone for the input. I'm still knew at this and learning so everything is valuable to me. Gonna count this as a lesson learned and will hopefully not make the same mistake again. Fortunately for me I didn't have a lot of money invested in SCTY.
     
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