Its a good question and one that many of us grapple with from time to time when we have a position in a stock and its underwater.
The reality is stocks go up and down and for long term investors there will be times when a stock price is below their entry price and other times when it is up. The key is what do you believe will happen in your investment time horizon, and does any news during your holding period cause you to change your mind about that belief.
Another reality is companies also go to the wall. BHP recently went below $15 - how many people believed that would happen. Probably most shareholders continued to hold, because BHP has a strong history and was not likely to go broke. But a company like VPC is not a BHP, its a riskier proposition. So while stocks go up and down, at some times the question may arise - will this stock recover or go to the wall? I'm not saying VPC is in that position, but no matter what the company, at some point a long term holder may be faced with the question of stay or exit because you fear you will lose your whole investment. My experience (I've been in that boat a few times, and waited too long) tells me now if I am asking myself that question, then I should be getting out. But that's just me.
Imo rule number 1 that applies here is capital risk management. What is your portfolio exposure to any position - i.e. what can you afford to lose on a particular position, whether short or long term - without affecting the overall objectives of your portfolio? How much can a stock go down before it contravenes your capital risk management constraints, let alone before you are asking the question about going the company going to the wall. Is the potential reward you believe will materialise sufficient to reward you for such levels of risk? These are the key questions you will need to ask yourself, whether for VPC or for any other position you have or enter.
Personally, I have had a few bad (i.e. read expensive) experiences ignoring capital management rules when I've been convinced about the fundamentals of a company and been wrong in the end. I've learnt from these experiences (1) to not invest too much in one stock and (2) that I am better at TA than FA, and so as a result no matter how much I am convinced a stock will go up, if it isn't and it breaks my TA based stoploss, I exit, and perhaps wait for another opportunity (or a cheaper price). Personally for me, I simply find it easier to accept that a candle has closed on the wrong side of a stoploss that I set before I entered the trade, than it is for me to accept I didn't understand the fundamentals of the company well enough - and I think that is partly psychological - because I can set my trade rules and just follow them and if it stops out well I allowed for that, whereas with fundamentals often it gets to opinions and unfortunately that's too grey for me.
And for me the TA goes hand in hand with my capital risk management - if I target my entry point on the chart, what are the support and resistance levels that give me stoplosses and targets, i.e. risk & reward that fit within the capital risk appropriate for the trade size. And of course for smaller positions I can accept larger price swings than for larger positions.
Hope that helps.
Cheers, Sharks.
VPC Price at posting:
4.3¢ Sentiment: Buy Disclosure: Held
