It is curious how people can see fit to sell their profits and hold their losses. In a game theory based logic, it is one of the worst possible ways to make money. It puzzled me for the longest time, because assuming that a stock was bought at a dollar, and it started falling constantly, the logical thing to do would be to sell it at a loss (relative to the original price paid), then buy it up after it falls.
The net effect is such: You started off with say...$1000. You bought a unit of stock at $1. The stock fell to $500 and is still falling. Common sense would dictate that the stock be held, since selling would realize a loss of $500. That's 50% off your initial capital. A really big deal. Yet many fail to realize that it matters little what the stock is worth. It is still a single stock unit. You effectively have no liquidity while holding that one unit. Assume that you sold at $500, and bought it back again when it fell to $400. Now you have one unit of stock, and $100 liquid.
Psychologically, it may have felt like you're now holding $400 stocks instead of $1000 stocks, but realistically you're still holding the same thing. What if the stock never appreciates back to near the level you bought it for? You'd be stuck holding an illiquid asset. Wouldn't it be better to maintain some liquidity to dive into the bear market when it starts to hit the bottom?
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I think one thing you are not factoring in "lag time", which is the time taken to "buy" and "sell" stocks in comparison with the up and down motion of the stock itself. Your assertion only holds if
1) the time scale of buying and selling was short compared to the time scale of the motion of the stock market.
2) The motion of the stock market was gradual (ie predictable)
Neither is true.
-moo moo
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