Everyone gets stuck in a losing stock position periodically. Getting out of it requires a strategy that deals with the stock and our emotions. Left unchecked, feelings can make a bad situation worse, even disastrous.
Here are the components of a strategy to get rid of a problem stock and prevent feelings of failure
First, take the stock’s current price as the only true price. Calculate your position’s value using that price and push cost and any other woulda-coulda-shoulda prices out of mind.
Second, think of today’s price as the best estimate of tomorrow’s price. Stocks don’t have momentum – investors create momentum, and it can change on a whim. So, just because the meme stocks have fallen daily doesn’t mean this is an irreversible downtrend.
Third, realize that you are not alone. Any stock that falls significantly locks in investors who, for one reason or another, do not sell. Instead, they wish they had done so at a higher price, thereby creating a miserable feeling of failure and guilt. The trick is to get out in one piece. (No, not without a loss, but without emotional baggage.)
Fourth, know that Wall Street is dealing in the stock. (No, they didn’t get knocked out of the game by GameStop. They are always in the game, and, in the end, they win.) What Wall Street knows is that investor emotions can create excess on both the upside (great for selling high) and downside (great for buying low). That downside, through fear, has the capacity to produce a selling frenzy, known as investor capitulation (i.e., giving up and getting out).
Fifth, take the earnings cycle into account. For most of the meme stock companies, the earnings reports will not come until August, having last reported in May. So, we are in the middle of the in-between period, which is generally empty of fundamental information. That lack of fundamental information means the stock price is reliant on investor attitudes.
Sixth, take the quarterly cycle into account. The window dressing of late June is over and investment managers are pursuing their independent approaches for generating capital gains. For this reason, July (like January, April and October) can be ornery months for the stock market. Just when things seemed settled and understandable, the market (or groups of stocks) take off in a puzzling new direction. For meme stocks, the change has been huge.
Seventh, take the daily/weekly cycle into account. For the first four days of this week, the stocks have sold off every day. Certainly, such steady moves can represent former meme stock holders getting out one-by-one. However, such moves can be aided by day traders and short sellers helping it along – not necessarily by outright selling, but by tactically buying and selling to generate frustration and worry for “normal” shareholders.
The very important point now is that this is Friday. Because it’s the final day of the week, those day traders and short sellers will want to clear out their positions by the market’s close. Not doing so means they run the uncertain risk of adverse news coming out over the weekend. Therefore, if a meme stock makes a large move up of down early in the day, it could well be reduced or reversed later. Moreover, often Friday’s stock market moves in a direction contrary to the previous four days – a sort of leveling out.
So, the stage is set – now what?
Taking all the items together, considering selling some or all of a losing stock position if a price rise occurs seems like a good strategy. However, there are three special challenges regarding meme stocks.
First, the meme movement has been unique. It was dramatically so on the upside, and now we are witnessing the dramatic downside. Are we near the end? Hard to tell because the stocks have fallen by huge amounts, but most still remain well above the level from which their run-ups started.
Second, the meme stock companies have weak or no fundamentals, and all have negative earnings. Therefore, waiting for the earnings reports means hoping for some sort of good (preferably, great) news. Hope is always a low probability.
Third, many meme stock investors are new to investing. Therefore, they are prime candidates to make classic mistakes, like capitulating (selling out) at the bottom.
Therefore, the best strategy for removing a losing meme stock position looks to be taking advantage any upside moves Friday delivers. Doing so would mean bettering Thursday’s closing price and removing the troubled investment before the weekend. Then comes the fun – moving forward by searching for a new stock to invest in.
The bottom line: Losing stocks are best relegated to the past
Service providers have a common complaint: “20% of my clients take up 80% of my time.” This math is also true with stock investing. However, the solution is easy. For consultants, they “fire” the troublesome clients and search out new ones. For stock investors, they trim (i.e., sell) the troublesome stocks and hunt for new ones.
Deciding when to sell a losing stock position is where most investors get hung up. They fear they will miss out on a quick rise, right around the corner. After all, the stock was up there not so long ago. Yes, but there is no gravitational pull from that higher price. Better to get out and then look for another stock with prospects built on reason.