Wednesday, June 23, 2010

confusion of long term hold and short term hold

It is natural to want to buy stocks for less and sell for more. But it is important at the same time that one does lose the original capital one invests. No matter what happens one should not risk the original capital. The first risk is that if the original capital is lost or decreased then further investment opportunities are lost in the future.

One should not get into the confusion and buy a stock that has rallied recently and declining from its 52 week highs below the 30 day MA. There is a great danger when one want to buy such a stock imagining that this stock will go up further in the future. An example is DPZ that touched its 52 high at 16 from 8 and coming back. Right now it is at 12. This was a perfect shorting stock at 15 when it crossed its 30 day moving average.

But there is a counter emotions and feelings in us that tell us to buy it cheap since the stock is declining. This is a blunder one easily falls to. Thinking of long term prospects one holds declining stocks like these that keep declining to no matter when. Then one get frustrated and sells them at a great loss to the capital. The second best thing if one got into such a bad decision is to sell it as soon as possible and get out.

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