Damage control is a huge component in profitable portfolio administration. The vast majority of institutional portfolios are completely invested regularly and so a procedure of continuously improving the portfolio is necessary. Once a stock is defined as a non-performer it ought to be sold and the proceeds moved right into a stock with more potential. Losers are frequently held way too long and performance is reduced subsequently. This upgrading practice assures that the portfolio adapts to change in a positive way. Stocks which might be too cheap to sell damage the portfolio twice - they under perform and they take up a slot in the portfolio that could be invested in a winner.
While bullish forecasts fail - the litmus test is derived from the market action - never wait for fundamental confirmation - sell stocks that break down - often, stock prices lead the news - accept as true what you see.
Keep clear of bargain hunting - stocks going down are the completely wrong stocks to own. Experience shows that many times, it takes quite a while to get a loser to turn around, perhaps even years. The danger of bottom fishing is the so called basing pattern is usually a consolidation period prior to the next leg down. Next, bottom fishing stocks convey more negative earnings surprises than uptrending stocks. Earnings disappointments, particularly surprises, cause spectacular psychology reversal of market participants.
When negative earnings surprises hit, they result in fast reversal from up to down and in most cases they don’t show a significant top. This downside move is often considerably faster than the upside was.
You should define what losers are in your mind. Losers are defined by their failure to perform. So if your profit thesis is a 5% upward move on a Bullish Flag breakout with a 5% stop loss on the downside and your 5% stop loss is struck, your profit thesis has become violated. The stock is a loser. Escape as quickly as you can. The stock is a loser because it failed to continue the uptrend on the Bullish Flag breakout.
It is always easy with hindsight to examine a chart and feel that the action would have been taken at the perfect time. It is way more difficult in real-time, while the problem is still uncertain, to become as assured of the result. Often, in my experience, the most effective decisions are made while the outcome is very much uncertain.
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