How to Exit a Bad Investment

Around 2006-7 a friend told me it was easy to make money in the stock market. We asked "How?" At that time Dabur India stock was trading around 100rupees. It might rise to (105-103-102)rupees or drop back to (98-100)rupees.

He thought trading between 100rupees and 103rupees for a 3% daily return could yield a 30% return in a month if managed over ten days. However, stocks can break their range dropping suddenly to 80rupees blocking the invested money. The following method might help you profit even when the range is broken:
Small traders typically start in the stock market with the goal of making quick and easy money.

They manage some initial gains but later hear stories about investors who became multimillionaires by holding stocks for 20 years. During a bull market they feel they're wasting time on small trades and sometimes regret booking profits when their stocks double. This greed turns them from traders to long-term investors often without noticing when the market shifts to a bear phase and all profits disappear turning investments red.

Assume a stock is range-bound at (90-110)rupees. Traders make money buying at 95rupees and selling at 105rupees but later the stock breaks out to 180rupees. Regretting missed gains they buy at 180rupees hoping it will rise to 800rupees. When the stock falls to 160rupees in a bear phase they don’t book the 20rupees loss hoping it will rise back to 360rupees. Instead, it falls to 80rupees and sticks to a range of (80-88)rupees for the next 2-3 years turning their investment dead.

Suppose you bought 200 stocks at 180rupees investing 36000rupees. If the stock falls to 80rupees your investment value drops to 16000rupees. If the stock fluctuates between 80rupees and 88rupees sell enough stock to get 1000rupees. For example, sell 12 stocks at 85rupees getting 1020rupees. After adjusting 20rupees for brokerage and delivery charges you're left with 1000rupees. Remember you still hold 188 stocks.

Invest this 1000rupees in a NIFTY 50 stock priced below 1000rupees placing a limit order at the previous day's VWAP. Repeat weekly. Whenever you achieve a profit of 4.5% to 0.5% on your average holding book your profit and exit.

This process provides several benefits:

1. Incremental Loss Booking: You only need to book losses in small quantities of stocks at a time giving you a chance to book profits if the stock rebounds.
2. Generating Profits: Your dead investment may start generating profits helping to recover losses.
3. Shifting Investment: Gradually shift your investment from moribund stocks to dividend-paying NIFTY 50 stocks.
4. Using Moribund Stocks: Use moribund stocks for swing trading instead of investing fresh capital.

This strategy helps you manage bad investments more effectively reducing the risk of large losses and enabling potential profits even in a bear market.