What is a Bagholder, and why doesn’t he sell coins?

The term bag holder is an informal term used to describe an investor who holds a position in a security that loses value until it becomes worthless. In most cases, the bagholder stubbornly holds onto their holdings for an extended period, during which time the value of the investment drops to zero.

Suppose an investor buys 100 shares of a new public technology company. Although the stock price initially or temporarily increases during the IPO, it quickly begins to decline after analysts question the business model’s integrity.

Subsequent reports of poor results indicate that the company is in trouble, and the stock price then crashes further. The investor who keeps the stock or is determined to keep his stock despite this disturbing tumultuous succession of events is a stock bag holder.

The history of bagholders

According to the Urban Dictionary, the phrase “bag holder” originates from the Great Depression, when people on soup lines held potato bags filled with their only possessions. The term has since made its way into the modern investing lexicon. A blogger who writes about investing once started a support group called Bag Holders Anonymous.

Bagholder – Disposition effect

There are a couple of reasons why an investor might hold poorly performing stocks. First, he may completely neglect his portfolio and be unaware of the decline in value of a stock.

But an investor is more likely to hold on to their position because selling it means first acknowledging a poor investment decision.

And then there’s the phenomenon known as the disposition effect, where retail investors tend to prematurely sell shares of a security that is rising in price while stubbornly holding on to investments that are falling in value.

In other words, investors psychologically hate losing more than they love winning. And, so they cling to the hope that their losing positions will recover.

This phenomenon is related to prospect theory, in which individuals make decisions based on perceived gains rather than perceived losses.

This theory is illustrated by the example in which people would rather receive $50 than $100 and lose half that amount, even though both cases end up earning them $50.

In another example, people refuse to work overtime because they risk paying more taxes. Although they may eventually gain from it, the outgoing funds are more important in their minds.

The Sunk Cost Fallacy

The sunk cost fallacy is another reason an investor may become a bag holder. Sunk costs are sunk expenses that have already occurred.

Suppose an investor bought 100 shares at $10 per share in a trade valued at $1,000. If the stock falls to $3, the market value of the holding is down to just $300. The loss of $700 is therefore considered a sunk cost.

Some investors are tempted to wait until the value of stocks goes back to $1,000 to recoup the investment,. But the losses have already become a sunk cost and should be considered permanent.

Finally, many investors hold a stock too long because the decline in value is an unrealized loss, which is not reflected in their actual accounting until the sale is complete. This hold essentially delays the inevitable.

A bag holder indicates an investor who holds on to poorly performing stocks, hoping they will rebound.

The behavior of the bag holder is explained by psychological reasons, namely that investors tend to focus on repairing losses rather than making gains.

Bagholder – Concrete example

Concretely, there are several ways to determine whether an action is likely to become a bag holder. For example, if a company is cyclical, i.e., its stock price tends to fluctuate in response to economic disruptions, there is a good chance that difficult times could cause the stock price to reverse. ‘stock.

But if a company’s fundamentals are weak, the stock price may never recover. Therefore, a stock’s sector can signal its chances of outperforming in the long run.

How does one become a bag holder?

Some bagholders lost track of their investment. As you open accounts with a new investment advisor and 401k providers, you can possibly lose track of your accounts. In this case, you could have stocks that drop to zero due to bad business economics. The solution here is to organize and check in on your investments.

Let’s focus on bagholders who hold stocks all the way to zero since they can’t quit it. There is a lot of behavioral bias and emotions in investing.

Whether you’re a newbie investor or a multi-billionaire hedge fund manager, all new info is met with confirmation bias when you buy a stock. Confirmation bias filters all new info to approve your prior opinions.

When one is so delighted with a value stock that all new data confirms your prior beliefs even when the stock goes to zero, one becomes a bag holder.

Signs that you are a bagholder

In trading and investing, stubbornness is a very costly trait. To become a good trader, you must sometimes get used to being wrong.

Small losses are part of the traders’ profession. You cannot win every trade. That’s why you always need to develop an exit strategy if stocks go against you.

In case you are a bagholder, you will never be in a position to make living trading stocks. Here are some signs you are a bagholder:

1.   Holding onto Big Losing Positions

If at this moment, you own stocks that are down 20% or even more for multiple months, you’re a bagholder.

There’s no reason to be down this much time on any investment. The common reason people end up holding losing positions is that they don’t have an exit strategy. You freeze up because you didn’t develop an exit strategy, and don’t cut the losses when they were small and manageable.

Your losing positions become so big since you didn’t want to sell. The loss is too painful to realize. That’s why you always need to have a stop loss order, no matter the time frame you plan on holding investments. Do hold onto a 20% losing position just because you keep telling yourself you’re a long-term holder. It would help if you were using the funds locked up in losing trade in a winning investment instead.

2. Turning Short-Term Trades Into Investments

New traders are used to doing this. They turn a day trade into a swing trade because they don’t want to suffer the loss on the day trade.

Some people turn losing swing trades into multi-year holds. The whole process usually goes something like this.

The investor found a random small-cap biotechnology company someone was pumping on Twitter. He or she does a little research, and everyone on Stock Twits is claiming that it is the next Amazon.

Investors buy some shares and immediately go up 40% on the position, convinced he’s a genius. He doesn’t make any profit because he thinks it will go up 40% every day.

The next day the trend reverses, and he is back to break-even. He keeps telling himself it’s going to go back up.

A few weeks later, he’s down 50% on position. And he finds himself sitting on the quarterly conference calls, praying for the new releases of a buyout.

3. Defending Losing Positions – Bag Holder Denial

Bag holders are so stubborn they care more about being right than making a profit. They consider that as long as they don’t sell a stock, it doesn’t count as a loss.

But in the first place, the whole point of trading and investing is to turn money into big money. Even if you strongly believe in the fundamentals of a company, it doesn’t mean you have to buy shares of the stock.

There is more to making a profit in the stock market than just purchasing stocks of companies with good fundamentals.

In general, in the world of investment, it’s everything about timing. It is knowing when to enter and exit positions at the right times.

Don’t hold your losing position just because your stubbornness tells you so or you are afraid to accept a loss. Take your money out on time. Invest it in education so you can learn how to trade markets properly.

If you have recognized yourself in any of these three, don’t panic. We all get in tricky situations here and there as investors and traders.

But you have to use these as learning lessons. Risk management is also your best friend in a trading process so make sure you implement it in every move you make.

In Conclusion – Don’t be a bagholder.

There is nothing worse than being a bagholder. Watching shares you once thought could change your life dribbling lower 15%, 25% – and your money disappearing is a psychologically challenging experience. And, of course, it entails the financial pain you have to endure.

Generally, the markets are full of bag holders, but by keeping in mind the above hints, you will be able to improve your chances of sidestepping potential mines. It is viable to find good-performing companies at bargain prices; you just need to put in the extra effort to find the one.

You might also like
Leave A Reply

Your email address will not be published.