"In Toyo Keizai ONLINE, a column is published" "If the stock price falls by 10%, you should cut your losses" This is incorrect!
Good morning, this is Matsushita.
In yesterday's newsletter, I wrote that I bought four stock investment books last week,
and that I read two of them the day before yesterday.
Yesterday, of the remaining two books,
I finished one and a half of them.
Within those two books, there was something very shocking written.
It was
"If the stock price drops by 10%, cut your losses."
That was what it said.
Even 15 years ago when I started investing,
I read similar content, and
even now they truly write such things.
Both authors of these two books were analysts at a certain securities company.
I will state this clearly and firmly.
"This cut-loss is wrong."
That wrong cut-loss has, as if to protect investors' funds,
been written in investment books for 15 years ago and now without hesitation.
I will explain simply why this cut-loss is wrong.
If you cut losses at a 10% drop and in the next trade the price rises by 10% to take profits,
you can recover, both books said.
In other words, if you secure a win rate of 50% with a 10% price drop cut and a 10% rise to take profits, you will win.
This is the first mistake.
Investors cannot secure a 50% win rate with profit-taking at a 10% price rise.
The second mistake is that they do not pay attention to position sizing.
If, for example, you invest 3 million yen in Stock A and it drops 10% triggering a cut,
and you invest 1 million yen in Stock B which rises 10% to take profits,
the losses are 200,000 yen more, and your capital decreases.
To discuss only cut-losses without any consideration of trading size is reckless.
Since it's a good opportunity,
not only to deny these important cut-loss ideas,
I will teach you how to make this "cut loss at a 10% price drop" work effectively.
It is about catching a market environment where prices tend to rise.
In other words, in a trading rule,
as part of something called environmental recognition,
if you continuously buy particular stocks under the premise that an uptrend is strong and the possibility of a decline is low,
this cut-loss may function normally.
Here, I used vague terms like "may be" because
I have not validated this cut-loss idea, so I cannot say for sure.
By the way, since I started making profits, I have never
used this idea of "cut losses when the price falls by 10%."
I also basically forbid its use to my students.
Rather, I teach more concrete and evidence-based cut-loss points.
After a long time, I read stock books again without narrowing the scope,
and even now it is somewhat reassuring to see that such cut-losses are still presented as the conventional path.
Reading these books, if many people were to cut losses at a 10% drop in price and
think, "I am an investor who cuts losses,"
then a curious term like "loss-cutting poverty" might be born.
"If the stock price drops by 10%, cut your losses."
This cut-loss is wrong as it stands, and
even if you implement it, your funds will not be protected or increased, so
please be careful.
