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Intelligent Investing

Stuck with a losing stock position?

/ 05:05 AM October 15, 2018

The market has dropped significantly this year. Not surprisingly, many investors are holding on to losing positions.

One of the most frequently asked questions we get nowadays is this: I’m stuck with a losing position or ipit. What should I do?

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My advice is, “It depends on the amount of stocks that you currently own.” If you have too much stocks, then any rally should be viewed as an opportunity to reduce your positions.

From a layman’s perspective, this means that you should sell any stocks that you bought using borrowed money (margin financing) or money that you need to pay for something in the next few months.

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The market is currently going through a difficult phase as the economy is suffering from numerous challenges, including high inflation, rising interest rates and a weak peso. The market is also suffering from consistent foreign selling as sentiment for emerging market equities such as the Philippines is poor.

Last week, sentiment for the Philippine stock market deteriorated further as the US stock market suffered from a steep sell-off.

Technical analysts are now raising the possibility that the PSEi could drop to 6,500, assuming the 6,900 support doesn’t hold. As such, it might not be a good idea to be heavily invested, especially if you can’t commit to holding on to your position for a long time as the market could stay depressed for a while.

However, if you can afford to hold on to the stocks that you now own, you should just stay ipit and keep what you have. In fact, if you still don’t own anything, now would be a good time to start slowly accumulating stocks.

Although the market is going through a difficult phase, valuations are already very attractive. As of today, 83 percent of the stocks in our coverage list are already trading below their 10-year historical average P/Es. Meanwhile 54 percent are trading at more than one standard deviation below their 10-year historical average P/Es, which means that these stocks traded at higher P/E levels at least 84 percent of the time during the past 10 years. I would also like to stress that valuations only become attractive when there are problems.

In fact, even sectors that are most sensitive to the steep rise in inflation and interest rates, such as banks, are too cheap to sell. Note that several banks are now trading below their book value even though the main problem facing them right now is higher funding cost and possible trading losses. In my opinion, these problems are not serious enough to warrant a sell-off to their current valuations.

Moreover, once inflation goes down and interest rates drop, banks should lead the market higher as they would be the main beneficiaries of lower rates through lower funding costs.

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Given the attractive valuations of stocks, I’m quite confident that they will return to much higher levels once conditions normalize.

However, as an investor, you need to be in a position to stay invested through these difficult times. Limiting your stock investments to a comfortable size is crucial for you to meet this goal.

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