365QOD-Day15

"...look at Enron now...it was at $80 and now it is at $60..it is a buy..(a while later) look at Enron now it is at $40, it is 2 for the price of one...BUY BUY BUY... (a while later)look at Enron now..it is a real bargain at $0"-Ananomous TV financial adviser

In last blog we talked about loss aversion.  So, how much of a loss should you stand?  Consider the chart below:

Loss %	% Gain to Recover
1	1.0
2	2.0
3	3.1
4	4.2
5	5.3
6	6.4		using	=100*(1/(100-loss%)*100-1)
7	7.5
8	8.7
9	9.9
10	11.1
15	17.6
20	25.0
30	42.9
40	66.7
50	100.0
60	150.0
70	233.3
80	400.0
90	900.0
99	9900.0

Notice that up to 10% loss it takes a 11% gain to recover to your previous level.  At 20% it takes 25%.  At 50% it takes 100% gain to get back to normal and above that it gets ridiculous.  So where do you draw the line? 

A good rule is 8%.  It is rule that I learned from William O'Neil's book .  At about 8% I look at the investment and conclude that I am wrong.  I need to kill this investment in order to preserve my cash and be able to invest in the future.

How well will this idea have worked out for the investor's at Enron?  Suppose it was at about $80 at its peak, so a 8% loss would have been a drop of about $6.4.  At the value of $73.60, the investors that sold would have looked like a genius to the ones that rode it down all the way to $0.

Today's question is:
What exist strategy(rule) do you follow to get out of a situation?