Most retail investors start buying stocks for a very simple reason: they spot a particular theme, news story, or trend and hope to make a quick profit.
Unexpectedly, after you bought in, the stock price fell instead of rising, and your account started losing money. That’s when you began to hesitate.
Should you sell? You’re reluctant to accept the loss. Should you keep holding? You have no idea when the price might recover. So you start making excuses to yourself:
“The company’s fundamentals are still pretty good. I’ll hold on a little longer.”
“Short-term declines are normal. The stock will definitely recover eventually.”
“As long as I don’t sell, it’s not really a loss.”
And so, a stock you originally planned to hold for a few days ends up in your portfolio for months, or even years.
You think you’re investing for the long term, but in reality, you may just be avoiding admitting you were wrong.
After a short-term trade goes wrong, the most dangerous thing you can do is rebrand being stuck with a losing position as long-term investing.
Today, let’s talk about how to tell whether a stock is still worth holding.
Whether a stock price can keep rising ultimately depends on three factors:
1 Story/Narrative
Is the market still willing to tell this story? Are new investors willing to buy into it? Once people stop talking about the story—or a counter-narrative emerges—the buzz can fade quickly.
2 Earnings
Is the company actually making money, how much is it earning, and does it still have room to grow? No matter how compelling the story, it ultimately has to be backed up by results.
3 Valuation
How much is the market willing to pay for it? When valuations are high, there’s little room for error. Once valuations start to fall, the stock price can easily lose support.
At least two of these three factors need to be trending upward for the stock price to have a reasonable chance of holding up.
If all three are deteriorating—the story has faded or turned negative, earnings are below expectations or even declining, and valuations are being revised downward—then the party is probably over. Clinging on at this point will often just leave you deeper in the hole.
A practical rule of thumb
Stocks with a compelling story and plenty of buzz usually don’t suffer a dramatic one-day collapse. The steady inflow of hot money can provide some support on the way down. But that doesn’t mean you can let your guard down.
One relatively simple indicator to watch: if the stock price stays below its 20-day moving average for several days in a row, it’s time to be cautious.
This often means short-term investors are no longer willing to buy the dip, and the excitement is starting to fade.
Furthermore, if you notice that the stock price is falling rapidly, but takes much longer to recover—and its rebounds are consistently weak—that usually means a large amount of money is flowing out. The story has run its course, and the hot money has moved on. Trying to ride it out with “long-term holding” from here will be much more difficult.
At the end of the day, when you bought the stock, you weren’t planning to become a shareholder or stick with the company for ten years. You just wanted to make a quick buck. If you got the direction wrong or the timing was off, admitting your mistake, cutting your losses, and moving on isn’t failure. It frees up your money and attention for the next opportunity.
The biggest problem with dressing up a failed short-term trade as “long-term investing” isn’t saving face. It’s that you keep tying up your money and mental energy in the wrong position.
The market never runs out of opportunities. What’s scarce is the discipline to admit when you’re wrong in time and save your powder for the next one.
It’s okay if you didn’t make money this time. There’ll be another opportunity. But whether you can seize it next time depends largely on whether you can honestly admit that this trade is over.
About the author: I trade U.S. stocks quantitatively in Shenzhen. If you share similar interests, feel free to connect, or we can grab a coffee ☕️