08 August 2011

A strategy for Market Collapse: Panic Sell or Cut Loss?

When market "seems" will collapse soon. Debt crisis, political crisis, etc. Suddenly, Cash returns as the King, again. Brokers and friends suggest that 20% cut loss is essential to retain our capital. However, what I think about is to implement a strategy to avoid being a victim of panic sell or selling my shares with lowest point.

Until today, I still cannot figure out why do we need to cut loss. Yes, you may say that we can buy back when the price of the stock drops even further. But, as value investor, the stock I bought is already undervalued. Cut loss maybe means I have no faith in my choices.

Finally, I come out a strategy to control my emotion (EQ) such as greed and fear. Greed is the reason why people tend to cut loss. Because they think they can buy back when the price drops further. Fear is the reason why people tend to panic sell. Because they have no or little idea about what kind of company shares they have. My strategy is:

1. Know what kind of company I own:
Do you want to sell out your company if it will generate 10% dividend annually, PE of 5, zero borrowing, and strong free cash flow?

2. Reserve 10~25% cash:
Yes, we should consider opportunity cost. I do not believe the majority of "investors" will do the same thing as I do. Therefore, "mega sale" is possible. A reservation of 10~25% is a preparation for this kind of opportunity. If the market does not collapse, I still can continue get more profit from my investment in terms of dividend and possible capital gain.

Some of my observation:
1. Most of my counters had very low volume (less than 300,000 shares) and dropped quite significantly (more than 10sen). This means only few "investor" panic sell or cut loss their shares. And most of the investors are not willing to "cheap sell" the good stock.

Of course, all of my counters maybe will drop further. Again, no one can predict the future. But our decision should based on evidence instead of other people actions. For example, if all your friends sold out all of their shares, do you sell out all of yours as well regardless there are excellent companies?

Note: So far, I did not see any of the major shareholders sell out their shares. Why? Why they can be so rich without trying so hard to speculate the market tend (Bull Vs Bear). All they do is focus on their business, make the company grow and earn more money. Simply, logic, solid and historically proof.

Lastly, I believe I will overcome this potential bear market with the above strategy, i.e. continue get profit (75% capital in stock market) if market recover suddenly; rebalance and buy-back more shares (25% reservation cash) when "mega sell" occurs; That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia


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