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I have read this post and several others by those who average down. An old
traders adage is "never take home a losing trade" and " the first lose is the best
lose". Trite, but true. The biggest problem with trading is that you have to
admit your wrong. A real blow to the ego of those that haven't the experience of
trading and don't realizing that it is part of the business.
This business is like any other. Money and credit (margin) is what you have to
purchase inventory. That is all that stocks, futures and options are to a trader,
inventory. Like Macys or any other retailer, you purchase to turn over your
inventory at a profit. The more times you turn over your inventory the greater
your profits (cash flow). If what you have doesn't move, it becomes White Flower
Day, and you put your bad inventory on sale. The difference between you and Macys
and other retailers is that you don't have to advertise and have people come into
your store in order to sell your inventory. You have a ready market, and ready
buyers. The price is established and published every minute of the trading day.
To me, averaging down is not a sound business practice. How many business keep
increasing the stocks on their shelves as the price keeps dropping and there are
no sales. How many businesses keep wasting their assets and reducing their
financial strength and hope to be successful in the future.
I have a sadder story then yours. I don't mean to turn this into a can you top
this scenario. A friend of mine called and asked my thoughts on a stock of which
he owned 250,000 shares. The stock was trading at $5.50. I looked at the stock
and told him that the best I could see on the stock was $5.75. He told me all of
the reasons why the stock was going to $100. He talked about his conversation
with the president of the company and the CFO. There were conversations with a
hedge fund manager, who was a large holder of the stock, about why this particular
company was great buy at this price. After all the conversation I simply asked,
why don't you take your $1,000,000+ dollars and watch what happens? If you have
to buy it back at $6.50, fine, you will own a few less shares. He had an $800,000
profit in the stock. That stock is now trading for under a dollar. If he had
sold it at $5.50 of $6.00, the high, and he still loved it, he could own 1,000,000
shares of it now. His last call to me was to ask the question, "should I buy more
here?". The dream liveth eternal. Have a good week end. Ira
wong wrote:
> Hi All:
>
> It's quite a humbling experience for me in the last few weeks.
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