Cutting Losses Short

In the last four months the patience of investors on the NSE has been severely tested and it is getting to a breaking point. The All Share Index dropped to a year low 53,366 on 25thJune. There was a brief rally for a week but most of the gains have since been lost. Mercifully, the low of 25th June has not been breached.

Right now the market has been so volatile that the safest thing to do by non professional traders is to sit on the side lines. At least that is what I have been doing in the last two weeks. Another thing I have been doing lately is reading and I have read a few gems.

One common theme that keeps recurring in all the books is the need to cut losses and move on. According to the authors hanging onto a loosing position is a refusal to admit a mistake was made in buying the stock. Investors will save themselves from financial ruin by cutting losses short. The common recommendation is to exit a position once 8-10% is lost.

I have a limit of 15% although I could exit earlier if it is obvious the stock is heading for a major fall. My rationale is that I usually have about 12 stocks in my portfolio and a 15% loss represents an average 1.25% loss in capital. That is tolerable.

Earlier in the year I exited Standard Trust Insurance before it became a loosing stock. I sold Japaul in March and cut my losses. If I had delayed the decision, I would have been looking at more than 40% loss. Cutting my losses short is a key risk management strategy I have adopted. Fortunately, in spite of the bear run, none of the stocks currently in my portfolio are in a loosing position.

My advice is to always have an exit strategy either up or down at the time of entry. It is a well tested successful risk management strategy. Without it financial ruin could be around the corner especially in a long drawn out bear market.