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Story: Mrs. B.C. Lakshmi
This is just a fictional story to explain the impact of leaving purchased stock un-attended. Character in the story is fictitious. Stock described in the story is closely based on a real stock data. This story has no intention of pointing out any specific issue with any particular stock. The behavior of the stock in this story is generic and can be observed with most of the stocks at one point of time.
Mrs. B.C.Lakshmi is an avid business channel watcher. She also invests according to tips provided by leading analyst on business channels. During October 2010 she got a tip from one of the business channel program to invest in an auto-mobile company. In first phase the stock rose from Rs.25 to Rs.175 in a duration of 9 months. Now, the stock is in the second phase of growth and it has the potential to go up to Rs.800 in the next one year. Current market price is Rs.150
Stock Graph at Time of Recommendation
Business channel or any similar sources provide tips on that moment and they do not care about investors' existing exposure (or portfolio composition). They are not accountable to remind the investors in case the tips failed. Even if the prediction meets the target they do not come to tell investors to sell out. Unfortunately, that stock turned around from the same point (Do you feel like déjà vu). Anyway, after 15 months of purchase by Mrs.B.C Lakshmi the chart looked like what is given below
Stock Graph 15 Months Later
If Mrs. B.C.Lakshmi would have followed Rule-X and got out at Rs.120 (20% loss) then she could have easily saved further erosion of Rs.60. Instead of 60% loss currently she would have got out at 20% loss only. If difference between loss of 20% and 60% is not very big then think otherwise. To compensate the loss of 20% one needs to make 25% profit in the next trade. We book such profits often, but, to compensate the loss of 60% one has to book a profit of 250% in the next trade. How often do we book such profits?
Conclusion: 1. Filing a loss is a wise decision at times before it hits the situation of un-repairable loss. 2. Either manage your portfolio yourself (if depending on external source of tips who do not take responsibility for the same) or register for some service (like APS) .
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