Stubbornly defending what you believe to be right in the face of harsh opposition is an admirable quality. It takes strong inner fortitude to enable someone to not be swayed to and fro by the opinions of others.
As admirable as this quality can be when dealing with others, it is possibly one of the WORST traits you can have when dealing with the market. Allow me to explain.
No matter how smart you are or how much research you do, there is no way to be right 100% of the time. The only reason you buy a stock is because you believe it will increase in value. However, before you put one penny at risk make sure you know where you will cut your losses. If your trade gives you your predetermined sell signal, have the humility to admit you were wrong. Don’t be stubborn. Don’t rationalize. Don’t hold and hope. Hit the eject button and sell. Yes it sucks to book losses, but it’s not worth the risk to continue to hold. If the stock is any good it will setup again and give you another buy signal down the road. If not, you can watch it implode from the sidelines.
It makes sense and sounds easy to do when talking in the abstract, but the fact is, even billionaire hedge fund managers can be prone to stubbornly digging in their heels when they have a trade going against them . Case in point: Bill Ackman of Pershing Square Capital Management and his dogged determination in defending one of it’s top holdings, Valeant Pharmaceuticals (VRX).
In fairness, being a “contrarian” has always been a part of Ackman’s shtick and he IS a billionaire, but wow, from a distance this looks like pig-headed obstinance on a grand scale. When VRX got cut in half from August to October 2015 Ackman doubled down and increased his stake. Then, earlier this year when VRX was hovering around $90, he added to his position again! Now after another bloody week. VRX has just one tenth of the value it had seven months ago.
I know that there are many different ways to make money in the market, but WE NEVER ADD TO LOSING TRADES in the 821x system. We take our loss and move on. Why would we want to tie up fresh money in a down trending stock?
As Bill Ackman can attest, stubbornness when trading can be quite expensive.