I keep hearing this talk about free money. Comments such as “i’m still in the stock with free money” OR “i’m riding free now” OR “I’m holding free shares.” These types of phrases have been tossed around regarding GGI.V, NVO.V, WHY.V and many other stocks that have enjoyed large rallies in recent weeks.
I had no idea there was so much free money floating around! Is there a tree with free stock certificates and hundred dollar bills hanging from its branches that I don’t know about?
In all seriousness this concept of “riding free” and “free shares” is a very dangerous and wrong-minded one. There is nothing free in the market, nothing. Each moment your account equity represents your money based upon your investment positions in the market (share price, share quantity, cash, etc.). The current stock price is the value you can buy or sell at, there is no other price.
Gambler’s often use the same logic with regard to their initial starting capital and tend to operate more recklessly with their “profit” than they would have with their initial starting capital. Casinos are built on this sort of logical fallacy. Once a losing streak begins gamblers often try to get back to their high watermark, which typically leads to oversized wagers and poor bankroll management.
The past is over and every moment in the market is new and unique. Operating from the past with illogical biases is not effective and can, at times, be ruinous. It’s important to remember that the market doesn’t know you exist, it doesn’t care about your cost basis, your feelings, and what you want to do with the money you hope to make in the market. The market is its own beast and as Peter L. Brandt likes to say “the market’s purpose is to redistribute wealth from the many to the few.” While this is a rather skeptical view of the market’s purpose, it is not wrong.
If you bought a stock at $2 and it is now $8 and you just sold ¼ of your initial purchase in order to “ride free,” you probably made a good move for risk management purposes simply because the risk of holding the position at $8 is far greater than it was at $2. However, your cost basis should be irrelevant. Your total portfolio size IS relevant as are your portfolio weightings. Technical (chart based) and fundamental considerations factor into my buy/sell decisions as does portfolio rebalancing, however, my cost basis and/or whether or not I have a double in a stock does NOT factor into my buying and selling.
So let’s bury this notion of “free money” and appreciate that there is no free money in markets. If you have an unrealized gain in a stock position you’ve earned it by investing your money and taking on risk. You’re not “riding free” if you sell half on a double, you are reducing risk from what may be an overweighted position (since it’s doubled in size) and still risking a significant amount of YOUR capital by remaining long the stock. Yes, if it’s in your brokerage account it’s your money, not someone else’s and the market doesn’t remember how much you started with or what your annual P&L is, or any of the other litany of nonsense I regularly see market participants blathering about.
DISCLAIMER: The work included in this article is based on current events, technical charts, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. The views expressed in this publication and on the EnergyandGold website do not necessarily reflect the views of Energy and Gold Publishing LTD, publisher of EnergyandGold.com. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.
