Stock market: knowing how to cut losses and let yourself be carried away by increases

Jean-Joseph Haas, founder of Haas Gestion and author of the book “Succeeding in the Stock Exchange without speculating” published by Maxima, describes the bad habit of savers on the stock market of taking their profits too early on winning positions and of keeping too long losing positions …. while the opposite should be done!

It is so pleasant to take your profits, so painful to sell at a loss. These are the typical mistakes of someone starting out on the stock market. Conversely, knowing how to cut your losses and let yourself be carried away by the increases is one of the great secrets of stock market success.

Precipitation and procrastination are mistakes that, in the majority of cases, result in limited gains and unlimited losses, the exact opposite of the intended purpose.

The right attitude consists in suppressing one’s natural inclinations and resorting to management principles whose logic, for some, comes more from counterintuition than from spontaneous reasoning.

To resist to the temptation

Resisting the temptation to take advantage of the first benefits to realize them is counterintuitive behavior. Refusing to get bogged down in unlimited losses is another.

For the proper application of these principles, it is necessary to understand to what extent price movements are due to cyclical or structural factors. The former, like a breath, exert their influences in the short and medium term, the others, more fundamental, have the capacity to modify the outlook of society in the long term.

We have just mentioned the notions of short, medium and long term. Indeed, because in terms of investment there are themes that keep coming back. The investment horizon is one of them. The stake is another. Likewise, a management principle is only valid in its context.

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A saver coming to the stock market to prepare for retirement will have a very different idea of ​​the long term from that attracted by rapid operations and playing with small sums, without stakes. This assertion has all the appearances of obviousness, yet it is fraught with consequences for those who ignore it.

The example of Hermès

Let us verify the validity of our principle by examining the stock market course of this magnificent growth stock that is Hermès International. Let’s go back in time as far as possible. Imagine how many times this stock has been considered expensive, how many times it has traded at its all-time high, how many times one has been tempted to take profits, how many times it has been sold.

At the moment, do you think this title should be sold for sector rotation reasons? Because interest rates are tightening? To do what with the proceeds of the sale? To buy cyclical stocks, inherently of poor quality?

The answer depends entirely on the profile of the investor. Everyone knows theirs. As for us, we go to the stock market to build up long-term capital, with a view to our retirement and to pass it on to our family. This is our objective, this is the stake. Do you know better ones?

So on the strength of our management principle, let this title breathe as long as necessary. The upside factors that have been driving it for decades will not suddenly disappear and will outweigh its temporary competition from cyclical stocks.

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Renault’s counterexample

Now let’s take a look at securities that are not suitable for long term, high stakes investments. These are mainly cyclical stocks. Let’s look at the stock market course of stocks such as Renault, Valeo, Agricultural credit, ArcelorMittal over the past five years. These titles peaked in the summer of 2017.

After declining for three years, they started a positive turnaround last November. Regarding the purchases made at the highest point, let’s count the waste of time and money if they have been kept all this time. What should have been done? Sell ​​them, but when, at what price, on the basis of what reasoning?

Precisely, there is no reasoning. We practice an experimental, pragmatic management that is in no way academic. Everything is arbitrary and a question of feeling.

To acquire these reflexes and be convinced of their usefulness, it is advisable to test this method like any new method, starting with partial sales which makes it easier to take action.

There is one final issue to be resolved. If a sold title picks up and starts to rise, have we not lost money unnecessarily? Yes, if we reason on a particular case. But if you generalize this tactic, the number of titles sold on time is likely to be greater than those sold wrongly. And all you have to do is let yourself be carried away by those who go up.

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