Ask Colin

I have invested in Estar (EST) at 37.5cents and now it is 13c. I also bought Seafood Online (SFO*) at 0.11c. You said the public sell low and professionals buy low then sell high. What should I do now? *Note: SFO since delisted - Colin

I am not a licensed adviser, because I choose not to be. It is not what I want to do - I prefer writing and teaching. Basically, I wish to teach people how to make their own decisions. The reason I tell you this is that I am not allowed by law to give you specific advice about your trades.

What I can do though is give you some general guidelines which you will have to adapt to your situation.

Firstly, the type of question you are asking is not untypical. That you are asking it tells me that you either do not have a clear plan for trading or are lacking the discipline to follow your plan. I find that the first of these is most common. You see, if you have a clear trading plan, it tells you what the decision points are. Without any clear plan, you have to think and rethink out every day what it is you are trying to do.

I do not know much about the fundamentals of either EStar or Seafood Online. You probably know more than I do. However, it seems to me that both are what is called "start-up" businesses. These are new business ideas for which the promoters have raised money from the public (maybe also some institutions) to set up the businesses and see if they can make a profit. Many of these businesses will fail completely and the shareholders will lose their money. I do not know whether this is likely with EStar and Seafood Online, but I find the charts tend to tell me what those who do know what is happening are thinking.

The EStar chart shows it listing over 50c and falling in a steady downtrend to 11.5c. There is a suggestion that the fall is levelling out, but this is more wishful thinking than hard evidence. So, the market is saying that EStar is a doubtful quantity. They think it is now worth only about 20% of what they thought it was worth on the day it listed. It may be that the company will make it and, if so, this will show up on the chart before the fundamental information comes to hand.

Should you continue to hold it? In general terms there are some important issues here. Firstly, what you paid for it is totally irrelevant. A share is only worth what you can sell it for. You have lost two thirds of your investment. The question you have to wrestle with is whether you take what is left and run. Secondly, the general advice I give and follow myself, is to get out of stocks in downtrends and switch into stocks that are trending up. I believe we have more chance that a strong stock will continue to go up than a bad stock will turn around soon. Thirdly, there is the psychological dimension, where "the public" will hold and hold till they cannot stand the pain any longer. Then they sell and that turns out to be the lowest price. So, the longer you hold on, the more you are likely to fall into this psychological trap. It is far better to get out of losing trades quickly and move on to a better prospect.

I think it is important that you forget what you paid for the share and look at its current situation. On the fundamentals, is it making a profit or a loss? If a profit, is it growing? If a loss, is it being reduced? On the technicals, where is support? If support breaks, you can expect the downtrend to continue. There must be some point at which you would accept you are wrong rather than lose everything. You also need to look around and see if there is a better stock to put your money on.

The Seafood Online chart is different. After a long fall, it recovered some ground and has been consolidating above 10c for six months. There must be some suggestion from this that the market either likes what it is seeing from the company or is at least encouraged to give it a chance to show some good results. There is a clear point on this chart where, if the price went there, I think the chart would be screaming that there was a problem. Likewise there is a fairly clear level at which, if price went there, the market would be betting on continuing improvement in the results from this company.

I hope this general advice will help you work out what to do. I am not giving you specific advice one way or the other on these stocks and my comments could be interpreted several ways. We humans are very good at seeing what we want to see in a situation and discarding the evidence that does not support out view. You have a difficult decision to make and I am not permitted to help you beyond these general guidelines.

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