 The Mathematics of LossesPublished Date: 2008-07-21 14:51:30 WorkOnInternet.com
Example One We have two investors, Freddie Free-Wheeler and Deborah Disciplined. Each starts with a portfolio of ten stocks, 100 shares apiece, and each is priced at $50. Freddie Free-Wheeler doesn�t have a sell discipline to limit his losses, whereas Deborah Disciplined does. Let�s take a look at each one�s portfolio six months after inception. Freddie Free-Wheeler�s account shows five stocks down 50 percent and five stocks up 20 percent each. Deborah Discipline�s account shows a loss of 10 percent for seven stocks and even for three stocks. Freddie Free-Wheeler�s account is down $7,500, while Deborah Discipline�s account is down only $3,500. What�s more, none of her stocks moved higher, while Freddie Free- Wheeler had 50 percent of his stocks showing nice gains. If you limit your losses, you can afford to be wrong more often with less of an impact on the portfolio than you would have if you were really wrong a couple of times. Example Two Stocks are going to fluctuate back and forth in price, and sometimes when we buy a stock, even though we have done everything we can to stack the odds in our favor, the trade just doesn�t work out right away. However, if you let that loss continue to mount and mount, you are creating a mountain instead of a molehill that must be scaled to get back to even. If a stock loses 50 percent of its value, it must double just to get back to even. However, if a stock loses 20 percent of its value, then you only have to see a 25 percent gain to get back to even (Manthematics Of Losses, right). Best stock recommendations to turn $1000 into $1,00,000, articles on stock market trading and stock investing on http://www.5minutetrader.com/.
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