If you have been following my thread, I had earlier emphasised 'Flight to Quality', 'Dead Stock' and 'Falling Knives Stocks'
Often it is important to take heed if your stock has broken a major support level because such a breach is usually followed by a steep fall. Around April17, I had cautioned about 'Falling Knives' stocks and indicated a Flight to Quality as exuberance has disappeared for many of yesteryear darling tech stocks. I also mentioned why it is better to remove dead stocks from your portfolio as it represents opportunity cost- not only do your dead stocks cost you more as they decline further but if you had divested earlier and place the proceeds into a higher quality stock that appreciates, you could have made up for the earlier loss.
As illustration , I am going to show you what happens if you had bought BUD shares at 30c in late Dec 17 and decide to cut loss when it major support level of 21c (on Oct 16 2017) was breached in Jan 24 2018 and plough the proceeds into Appen (APX) (flight to quality) on the same day.
So say you bought 50,000 BUD shares @ 30c ($15,000 capital) in late Dec 17 and on Jan 24, you sold all of it at 20.5c for a loss of $4,750. You plough the proceeds of $10,250 into APX shares @$9.16 on Jan 24 to receive 1,119 APX shares.
This is the outcome:
|
Column 1 |
Column 2 |
Column 3 |
| 1 |
$10,000 INVESTED IN |
No of shares on Jan 24 2017 |
Value today |
| 2 |
BUD |
50,000 |
$ 5,750.00 |
| 3 |
|
|
|
| 4 |
If $10k divested from BUD and invested into APX on 24/1/17 |
|
|
| 5 |
APX |
1,119 |
@$9.16 per share |
| 6 |
Value of APX today |
$ 16,482.81 |
@$14.73 per share |
| 7 |
|
|
|
| 8 |
Incremental gain |
$ 10,732.81 |
|
The value of APX holding would now be worth $16,482 , and you would have recovered all of the BUD losses made and still gain $1482 net gain overall. In contrast, if you held on to BUD shares, it is now only worth $5,750. So between the two alternate course of action, you would have been better off by $10,732 if you had taken the APX path rather than maintain BUD holdings!
Of course you say hindsight is great. But it does not detract from the importance of recognising (1) the delusion of hanging on a dead stock after a major technical support level breach and (2) the importance of opportunity cost - the same money can get better returns elsewhere.
