6/29/2022: Stop Loss is Your Friend

We can’t predict the future. But most likely we are in a new era, an era with modest investment returns. I was debating if I should stay invested in the formerly highly valued SaaS companies like DOCU. In fact, I sold some puts that are under water. I decided to take the losses, closed the open positions and start anew.

In the past decade, both companies and consumers are spending like crazy. This overspending trend culminated in 2021, coupled with other factors resulting in runaway inflation. People overbought things they don’t need and businesses in the professional sectors over hired. People invested all their cash into stocks, real estate and cryptos, sometimes with borrowed money. We are finally at the moment of a rude awakening. Individuals and businesses are cutting back on their spending on both consumption and investments. I think this is healthy in the long run but it’s hard to predict how long this consolidation will take. By nature we would likely see a recession while the cutback is happening.

In the mean time, I decide to take losses and cash out the positions that’s high risk: i.e. DOCU and ZM. I am sure these strong companies are going to last thru this slowdown and come out stronger. But it would take them some time to digest thru years of overspending on sales, marketing and R&D to get back on the right track. Personally, I also want to have a stronger balance sheet that could take another 50+% stock market fall with ease. I am currently 50% cash and 50% equity with no debt.

I am saddened to read about people contemplating suicide because of large financial losses. I know psychologically it’s really hard for people to part ways with losing bets. But learning to admit mistakes, taking losses and managing risk is an important skill for any investor. At the end of the day, it’s just money. Money is a tool to make our life better. It’s a means to the end, not the end itself. If you are depressed or anxious about your portfolio, I have two suggestions:

If you have a complex portfolio with derivatives, concentrated positions or margin debt, I would suggest you to close the positions first and to start anew. Don’t dwell on past mistakes or try to do mental accounting on how much you have to earn back to break even. Many people inadvertently become gamblers by betting bigger trying to break even. Don’t fall into that trap. Always look forward and be objective.

If you have a well diversified portfolio and you don’t need to sell to fund major purchases, I would suggest to log out your brokerage account and not look at it for the next 5-10 years. Most likely your portfolio would be fine and you are probably getting some dividends along the way. Again, it’s just money. It’s a tool. If you don’t desperately need that tool for a while, no need to stress about it.