Taking a Loss.

As I opine regularly that the most important element of my trading and investing success is the goodly number of mistakes I have made over three decades of investing and learning not to make the same ones again.  Of those mistakes far and away the most important one I no longer make is knowing when to take a loss. Most people make this mistake over and over and it keeps them from making real profits in the stock market or any market for that matter.

 

 I have made several mistakes in the last six months of trading. Frankly the mistakes are picking stocks that did not perform as well as I expected.  Not going to spend time going over the details as they are not important. What is important is that I have tagged them mistakes and by the end of 2011 will sell them out of my portfolio and most likely at a loss. That loss part again is the part where most investors and traders have the problem.

 

Taking a loss means you have accepted that the stock will not perform going forward and the best choice is getting as much of your principal back and using it in better opportunities.  Most people decide not to take the loss and begin wishing and hoping that the stock will come back to at least the original price and save them from the loss. Yes, you can do that but the time opportunity wasted and the opportunity to actually make profit in another investment are not there as long as you do not accept your mistake.

 

I know several people currently who are down big in certain local bank stocks who are doing just that hoping their investment will get back to the original value. Chances are good with the current banking landscape that is not going to happen. But think for a moment if it did happen, how long would you have to wait for it to happen. How long are you going to wait for the recovery and is the time opportunity lost in another better and quicker profit you are missing out on with the wait.

 

Most times your best choice in any bad investment is get it sold and move on. Also take into account Uncle Sam is going to help you out on the loss allowing you to take up to $3000 annually in capital losses against regular income and carry forward the loss indefinitely until you make enough capital gains to eat up the losses.

 

So take a look at your investments and as we move towards year end weed out your bad investments and move on to better opportunities.