Did somebody actually sell stock when Chinese market fell?

[Runner1]

If you did: maybe you could share your motivation?

[aquaswim47]

Last August 5 or September 5, I mistakenly sold out of my aggressive positions. I did not consider a potential 15% increase, 10% decrease to be a good risk/reward ratio. My motivation was from a risk/reward analysis, not panic. Had I sold in May (I was thinking of doing that, but Cramer snapped me out of it), than that would have been panic. I had only 40% of my money in stocks, but a lot of it was in small caps. I was glad that I sold since that particular small cap mutual fund had underperformed the market (from September 5 to the present). Instead of selling at a $250 loss, I ended out with about a $40 loss by staying in the game. I consider a $40 loss the cheapest course, I've ever taken.

One thing that could cause people to sell would be a margin call. Lets say, an individual buys stock with a 25% margin requirement. Instinctively, I think that they put up 100% and the broker puts up 25%. But, instead, they put up 75% and the broker puts up 25%. Lets, say the interest rate they pay is 0.7974% per month (10% annualized). Lets, also say the individual must put up additional collateral, sell shares, or sell everything when the margin requirement meets or exceeds 40%.

Investor A wishes to make a $10,000 investment in 4 investments. One is a global ETF ($3,500) and one is an US index ETF fund ($3,500). The other two are Company A and Company B ($1,500). Company A ($1,500) has great prospects and Company B is an "exciting" stock. He ponies up $7,500 and takes margin by putting global ETF and Company A as collateral. The global ETF goes down by 12.5%, the US ETF goes down by 10%, Company A goes down by 7.5%, and Company B goes down by 40%. 3 months have passed.

Company B = $900
Company A = $1,387.5
Global ETF = $3,062.5
US ETF = $3,150

Total Value of Collateral = 4,450
Total AccountValue = 8,500
Total Loan Amount = $2,500
Interest Expense = $60.30
Net Value = $5,939.70 --> Margin Call

The prospect will be told that he or she can sell $2,560.30 of shares to pay off the loan, put up additional collateral, or have the collateral sold to pay off the debt. The individual decides to sell the shares to pay off the loan.

The investor lost $1,500 (5,939.70/7,500 - 1) = 20.8% loss
The investor would have had an unrealized loss of 15% or an extra $435.30 ($375 + $60.30) if he or she had not used margin. Had the market fallen further, it is possible that her shares would have been completely wiped out (including additional collateral). Most importantly, by paying in cash, you're not forced to sell at an inopportune time; you can sell when the market rebounds as long as your able to pay current bills and meet current expenditures.

Suggestion 1 to avoid selling at the bootom: never buy on margin.

Similarly, if you short a stock and the value goes up by a high number, such as 75%, you may receive a margin call from your broker. For example, if you shorted the NYSE last year, you would have received a margin call. Lets say, you receive the margin call when the stock is 73.5% higher and the trade is executed by the time it is 78% higher. You also had 10% interest expense. You are left with only 12% of your investment (a staggering 88% loss). In order to make up for such a loss, you would have to have 9 companies that went bankrupt on shorting those stocks (not likely).

Suggestion 1a to avoid selling at the top (on a short): always use stop limit orders, always set a price that you will sell the short at if your strategy did not work, be ready to pay during a short squeeze, and maybe get an index that shorts the market rather than an individual stock. Also consider using put options on a stock that is very volatile instead of shorting the stock. Most likely, you'll lose the money you invest, but you can buy more shares with less dollars (so obviously put less money at risk) than you would have put had you shorted the stock. Shall the value go down adequately and you will be rewarded much more by puts than by shorts. However, shall the price stay the same or increase, you will lose your entire investment in the put option.

Suggestion 2: Never Panic. "Nobody ever made a dime panicking" (Cramer). Your nearly guaranteed of selling at the bottom if you panic.

Suggestion 3: Always have a good emergency fund to pay 8 months to 1 year of expenses. Also have a good disability income policy that pays for both physical and mental illness and that pays you in the event that you have to take a job for much less pay as a result of your disability (rather than a policy that requires you to not be able to perform any work). If you have an 8 month to 1 year emergency fund (about $35,000 to $50,000 in a low to average cost neighborhood), you can choose an elimination period of 6 months and probably can forego any temporary disability coverage.

Suggestion 4: If you have a family, get good term insurance. If you're not a saver, choose whole life coverage. Most likely, you benefit by taking the premium you would have paid towards whole life and putting that into a RothIRA every single month. The return on a whole life policy over a 20 year period is only about 1%; if you last 10 years, you lose a significant amount of money. You'd have to be a pretty bad saver to like whole life insurance. I don't think anyone on this board would ever need whole life insurance because were avid savers and investors.

Suggestion 5: Always wish someone good will. This will make it easier to make your own decisions and focus on your goals. If you hold a grudge or are jealous of someone, you may miss out on opportunities or take on more risk which can hurt your financial future.

[aquaswim47]

I think that before you invest, you really need to think of who will be affected by the decision. If you have a wife or a husband, you cannot make your investment decisions alone (since the other might have much less risk tolerance). I like when you listen to others, it can help you but it can also hurt you. If she panics, and claims she wants a divorce if you don't sell your shares (at a major loss), than you might oblige. But it would have been cheaper to have a balanced fund that would have had moderate fluctuations in share price than to sell at the bottom. Unfortunately, that means you'll have to work 3-5 years longer than using an aggressive growth fund to have the same amount of money to retire on. If the market performs at least in the 30th percentile (like from 1927 to 1967), you might regret that decision. However, if it performs poorly (such as from 1896 to 1936), you'll be quite satisfied in your decision. The Dow went from 40.71 to 386.10 in September of 1929. Most people would have sold it in their retirement in the 120's (they only tripled their money over the 40 year period); however, if you timed it just right you could have gotten as high as 180 (somewhere in 1935 or 1936, most could only get 120's). If you had switched to a balanced portfolio (in September of 1929), you might have lost as much as 25% (the equivalent of having gone from $40.71 to 289.58). Not bad!!!! Had you done it in October of 1929, you would have sold at $273.51 (you might have gotten as low as 212.33). Assuming you lost 25% of your investment (a very conservative estimate), it would have been the equivalent of going from $40.71 to $205.13 (still not too shabby) since you got 5x on your money instead of 3x. Lastly, had you sold in August (rather han be a hog and had been slaughtered), you would have sold it for at least (a minimum of) $336.13 (that's a really good return. In a balanced portfolio, over the next 7 years, you would have a price of 252.09 (a gain of nearly 6.2x, really not too shabby). If I was investing, I would have rather sold at $336.13 than chance going all the way down to the closing price of October 1929 of $205.13, at least I hope that's the move I would make. I actually probably would have sold the year before at around 260. With a 25% loss assumption during the 8 years till retirement, I would have 195 (nearly 4.8 x the initial amount).

The problem with the theory is it assumes you made the payment in a lump sum. The reality is your return would be much less since you dolllar-cost averaged from 1896 to 1936 or the better option of having dollar-cost averaged from 1896 to 1929 and having a balanced fund from 1929 to 1936 (and selling in 1935 as an opportunist, the year after FDIC insurance was created).

[anfern057]

I sold some puts yesterday for a 100% increase in a few weeks. But I don't think that counts.

...If only I held on to my QID when the Nasdaq was trading over 2500

You win some you lose some.

[aquaswim47]

I am very happy that you timed the price of the puts correctly. Nice work and keep up the great trading.
Nathan

[aquaswim47]

I'm glad you're taking profits in the Chinese market (if you bought at the right time) or cutting your losses at 3%. Keep up the great work. I wish you well.

Nathan

[aquaswim47]

Well I hope that works out for you. Wish you well.

[aquaswim47]

Looks like a great bounce, especially since the DJIA hasn't recovered yet. It looks like a great uptrend for your portfolio.