Ed Seykota is one of the greatest traders of all time. He became popular after Jack Schwager dedicated a chapter of his book ‘Market Wizards’ to Seykota.
One of his most famous quotes is “If you can’t take a small loss, sooner or later, you will take the mother of all losses”
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For traders, taking a small loss or following a stop loss with discipline, can often be the difference between a minor loss and a major capital destructing one.
New entrants to the stock market too can learn a lesson or two from the quote.
Often new investors make the mistake of buying mediocre companies and when the stock begins its inevitable slide downwards, they prolong the pain – hoping and praying that the price will rise back to what they bought it for.
In most cases, the price never comes.
In fact, most of these stocks continue to fall until they become penny stocks.
There are several examples from the 2016-2017 bull run of mid and small cap stocks. Many companies which were commanding extremely high valuations, collapsed and succumbed. Most of them due to frauds, more popularly known as chor companies in India.
One such company which destroyed the wealth of several investors is Sintex Plastics. The stock was hyped on news channels and investors blinded by the euphoria of the markets in 2017, invested in such companies.
Not just retail investors, but several mutual funds too had invested in Sintex Plastics.
Check out the graph:
Yes Bank, Vakrangee, PC Jewelers, DHFL, Reliance Capital and several other companies were the ‘wealth destroyers’.
A simpler solution would be to follow what Ed Seykota once said and cut the losses early – before they get too big.