February 15, 2015

Am I a genius or a fool?

If I buy a stock and then the stock gives a 200% or 300% return in 6 months, does it mean that I am a genius?

Obviously not.

And if the stock loses 50% in 6 months, does it mean I am a fool? No.

These are random events and have nothing to do with my being long or short in a trade!

I am foolish IF I cannot exit a loss making position OR I cannot ride a profit making trade as long as possible.

And yes, I have been foolish several times in my life though less often now than before. So sharing this experience becomes important so that others can benefit from this.

Now it has taken me years to understand this which now obviously looks very obvious and has been repeated in most stock market textbooks.

But for most people, it is not easy taking a loss and there is a strong tendency to "book profits" whenever you get profits. Unfortunately, this approach will never help you earn big money and more often you will see that after running a lot you are still in the same place. Your broker has however been earning slowly but steadily.

Summary: book losses fast and hold profit making positions. The opposite will not earn you money.

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