Run and you will be safe

Consider that you are working in a multi-storeyed sophisticated building. Chances are high that you were taught by the fire squad team there, how to escape in case of fire. If you had ever attended that drill you will know that at the time of fire and asked to exit, you have to simply get up and start moving towards the exit (staircase) without any other thought. No saving your files, no shutting off your computer. No searching for valuables.
Now consider that as you are reading this a fire breaks out. Will any of you stop and try to figure out why? What caused the fire? That person will easily be termed as a stupid, foolish idiot and is most likely to lose a considerable portion of his body if not his life. How in the world would anyone be investigating the cause of the fire when all he has to do is run away from it.
Though so obvious, we all do the same when there is a fire in the stock market. Instead of running with whatever we have, we sit back and start analysing the reason for the same. How foolish!! And the fire slowly starts eating our profits (if any) and pushing us deeper into loss (read debt for most people). Still no reaction from the mass. But the funniest part is that those who run are termed as ‘Panic Sellers’. The stock market sometime falls further and touches a new 1 year low. Still people sit and watch without even reacting. “It will bounce’ they say and keep waiting. This foolishness may not be so obvious in the case of an index (say Sensex or Nasdaq) as probably (even this is not true) it will start moving back on the positive side.
But consider the case of individual stocks. The chances of a rebound are slim atleast in a definite time period considering that you could have earned a lot more booking profits and investing the amount elsewhere instead of waiting for the stock to come back to life. Let us say you buy stock XYZ for 500 Rs. It goes to 700 Rs., then something happens (the analysts in the TV show will tell you 1001 reasons why) and the stock starts falling to 600, 550 and then to 400. Ideally you must have had some stop loss below 700 booking you a decent profit. But people keep waiting even after it reaches 250. They say it will bounce back. But please note that the stock has fallen 50% from 500 to 250. But to even come back to 500 it has to rise 100%. That is maths for you and it will always work against you.
But this does not mean that stocks that fall to 50% below their value will never come up back to 100% or even move 1000% up. Many people investigate why the stock has fallen and somewhere (either in a TV show: CNBC or still worse in some blogs or messageboards) they get a valid reason for holding the stock. Chances are slim. It is like trying to find a reason not to run in case of a fire inside your building and still being alive at the end. Will you take that chance???

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