Every loss is an important lesson

 "The willingness to accept responsibility for one's own life is the source from which self-respect springs" Joan Didion

Whenever we make a mistake, it is important that we learn from it. No different is this in the stock market. Bad investment decisions can wipe you out quicker than you think, obliterating the profits you have painstakingly accrued over months or years. That is why risk management is key to investment success. Even the most promising of investment theses can end up very badly.

If you are losing money in stocks, then it is crucial to re-examine your investment strategy so that future losses can be minimised:

1. Are you taking profits too soon and taking too long to cut losses?

2. Are you  cutting losses too early without letting the stock have a chance to recover? As the saying goes, you can die of a thousand paper cuts.

3. Are you trading on emotions when you have a PNL target to meet or after a huge loss or series of losses?

4. Did you do your due diligence before hitting the "buy" button? "Hot stocks" and hype is not a substitute for thorough research into the company and its prospects

5. Do you have the discipline to cut losses and manage your risk when it comes to that? It is my belief that for investments in which you are less confident of, a 15-20% cut loss margin is appropriate. On the contrary, for blue chips with strong fundamentals, there may be no need to cut loss until the 30-50% mark, by which time you should thoroughly re-consider whether it does in fact have the strong fundamentals you think.

6. Since a 15% cut loss margin is used, do you ensure that you let your winners run past the 15% mark so as to generate positive expectancy? The worst mistake investors make is to take profits too soon and to let their losses run too long.

7. Is your investment approach suitable? If you tried day trading and it did not end up well, then maybe you are more suited to swing trading or long term dividend investments. Examine your personality and disposition, risk profile, investment goals and then decide which investment approach is most suitable for you and your lifestyle. A swing trading approach may not be suitable for you if you find that timing the market does not work very well for you - in that case, try to reduce market timing and instead focus on trade management strategies (eg, taking partial profits on your winners and re-investing it in batches in laggard low-valuation stocks) or even a more passive investment approach.

8.Are you chasing the highs? Too often, we get too excited when a stock is trading high but for fundamentally sound companies, it is best to buy low for maximised margins. Examine whether contrarian investing suits your personality (eg, buying the lows in fundamentally sound companies, preferably blue chip stocks)

We are always learning and as long as we take responsibility for our mistakes, and not push it to bad luck, stock market weakness, and so on, we can reduce the chance of making the same mistake again. 

As Rayner Teo, an esteemed investment guru has mentioned, a big gain is fine, a small gain is fine, a small loss is fine, but never a huge loss which will wipe your portfolio out.

Until then, safe trading!