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What you need to do when your stock is crashing

by , 28 March 2014

“Francois, my stock has been dropping in the past month, what should I do?”.

Stocks crashing are an inevitable part of investing... It's a risk you take every day that you're invested in the market.

It's what you do when this happens will have a huge effect your long-term investing success…

But before I tell you what you SHOULD do when your stock crashes let's first look at what you SHOULDN'T do…

Three of the biggest investing mistakes you can make when your stock is dropping

  1. Focus on the stock price and not intrinsic value

Remember, a stock price does not always reflect the REAL value of a stock. If the stock drops 10% or 20%, it’s easy to feel like the world’s ending for a stock you’re invested in.
But the very worst thing you can do is make an emotional decision at this stage.

As an example, in November 2012 Steinhoff stocks were trading at R29.50 each – I got into the stock shortly before at R27. By May 2013 the stock dropped 25% to R22.20.
Even though I knew the intrinsic value of the Steinhoff stock was MUCH higher I let emotion get the better of me and sold the stock as soon as it recovered to R24. Happy to cut my losses. Today, less than a year later the stock has doubled in price – even surpassing what I believed to be its intrinsic value…
Having allowed my emotions to get the better of me truly cost me BIG with this mistake – don’t make it yourself…

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  1. Hold on to a loser stock until it breaks even

This must be one of the most common mistakes I see investors make.

A stock goes into a loss making position. They know they must sell. But then keep holding on – not wanting to take a loss but rather wait for the stock to recover so they can sell it at breakeven…

Some time ago I had an investor ask me what he should do with his 1Time stocks. He remembered me warning investors to get rid of the stock when I wrote about “The one penny stock to avoid today” in 2012.

But, he said, he didn’t sell his 1Time stocks stock because he first wanted to recover some of his losses before selling the stock…

Can you see how completely flawed that logic is – knowing the stock could go bankrupt but waiting for it to go UP before getting out?

If you know that a company is a hopeless case – get out, move on. Don’t stick to a loser without hope. Your cash can be used better elsewhere.
  1. Not have an investing plan, strategy or clue…

I’m sure you’ve heard of a friend telling you to buy a ‘sure thing’ or the media talking up a stock.

It’s a mistake buying this in the first place…

But even worse than buying a stock this way is buying a stock without a plan.

You need to have a plan when you buy a stock, a plan that tells you when to sell after it goes up, but also a plan that tells you when to sell when it goes down.

If you don’t have a plan you’ll be left clueless, scared, and losing money…

What you SHOULD do when your stock is dropping

So by now you should know what NOT to do when you have a stock that’s dropping, or have already dropped…

But what SHOULD you do?

Well it’s as simple as having an exit investing strategy.

Depending on whether you invest in blue-chip stocks, penny stocks or perhaps trading forex you could have a couple of different strategies.

But being a penny stocks investor myself I prefer using a simple investing strategy: Cut your losses on speculative stocks without delay - but hold on to the little stocks you really believe in - as long as the fundamental reason your bought them in the first place remains true.

For example: If you bought a tiny biotech stock because you thought its latest wonder drug was going to succeed in consumer trials, but the drug failed in the last round of lab tests, you need to get out!
Don't say, "Well, the company has other things cooking, too" or "Well, I've lost SO MUCH already, how much worse can it get?"

If the reason you bought the stock is no longer valid, get out.

However, if you bought a mining company that’s set to double production in a valuable rare metal in the next six months, and it dropped in price due to global market sentiment without anything changing to the real reason you bought the stock – well then you hold on tight!

But for this investing strategy to work for you – You need to remember one more thing. NEVER invest with money you can’t afford to lose.

Here’s to unleashing real value

Francois Joubert

What you need to do when your stock is crashing
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