What does 'Take a Bath' mean?

Take a bath is a slang term that refers to an investor who has experienced a significant loss from an investment. Investors whose shares have declined substantially are said to have taken a bath. For example, during the Great Recession between 2007 and 2009, or the crash of technology stocks in early 2000, many investors, because of their large losses, were said to have taken a bath.

BREAKING DOWN 'Take a Bath'

An investor may take a bath on an individual investment or on her entire portfolio. Stock-specific news, such a company’s earnings or an unexpected profit warning, may result in an investor taking a significant loss. For example, an investor would take a bath on Amazon.com, Inc., shares if the stock opened down 20% after a disappointing quarterly earnings result. A prolonged bear market may cause an investor to take a bath on his portfolio as a whole. Stocks in the same sector may take a bath due to industry-specific news. For instance, pharmaceutical stocks may sell off if the Food and Drug Administration (FDA) were to ban a specific drug.    

How to Prevent Taking a Bath

  • Risk Management: Investors can reduce the chances of taking a bath by using a stop-loss order. For example, if David buys Caterpillar Inc. for $160 a share, he could set up an automatic trigger to sell his holding if the stock trades below $140. Investors could also use the 2% rule to protect their capital. (For more, see: Forex Trading Rules: Never Risk More Than 2% Per Trade.)

  • Diversification: Diversifying a portfolio minimizes the chance of it taking a bath. Investors could include different asset classes that have uncorrelated returns, such as stocks, bonds, cryptocurrency and forex.

  • Hedging: Investors can prevent a substantial loss by hedging their investments. Hedging strategies include using put options, short selling stock or purchasing inverse exchange-traded funds (ETFs). For example, if Tim’s portfolio primarily consists of banking stocks, he could hedge by buying the Direxion Daily Financial Bear 3X ETF.

How to Recover after Taking a Bath

  • Accept responsibility: Investors need to accept that they agreed to take the investment. Blaming their investment advisors or the market doesn’t recoup the losses. Instead, they should determine what factors contributed to the loss to try and prevent a similar situation occurring in the future.

  • Put the loss into perspective: If investors take a bath on a specific stock or their portfolio, they should look at their long-term investment returns. Stock market gains over many years typically offset short-term trading losses.

  • Use the loss for inspiration: After taking a bath on an investment, an investor should determine where they have weaknesses and improve in those areas. For example, if a trader doubled his position to try to recoup a loss, he could work on strengthening his discipline. (For more, see: The Importance of Trading Psychology and Discipline.)

RELATED TERMS
  1. Big Bath

    A "big bath" is an accounting term for manipulating a company's ...
  2. Write-Down

    A write-down is the book value of assets whose fair market value has ...
  3. Capital Loss

    A capital loss is the loss incurred when a capital asset that ...
  4. Hedging Transaction

    A hedging transaction is a position that an investor enters to ...
  5. Specific Risk

    Specific risk is a risk that affects a minimal number of assets, ...
  6. Selling Hedge

    A selling hedge refers to investment strategies involving contracted ...
Related Articles
  1. Insights

    Bed Bath & Beyond Fights Slumping Stocks (BBBY)

    More than a week after releasing disappointing third-quarter fiscal results, Bed Bath & Beyond continues to struggle with declining stocks.
  2. Investing

    Bed Bath & Beyond Stock: Now Too Cheap to Ignore?

    With its shares down year to date following poor earnings, Bed Bath & Beyond could be a compelling opportunity for value investors.
  3. Trading

    Bed Bath & Beyond Reports in Recovery Mode

    Heading into Wednesday's earnings report, Bed Bath & Beyond is too cheap to ignore with a P/E ratio of just 6.58 and a dividend yield of 3.19%.
  4. Investing

    Wall Street Slashes Outlook on Bed Bath & Beyond

    Bed Bath & Beyond shares plunge as analysts cut price targets after lower-than-expected guidance.
  5. Investing

    Bed Bath & Beyond Beats on Q4 Revenue, Earnings

    Bed Bath & Beyond (NASDAQ: BBBY) went beyond expectations for the final quarter of its fiscal 2016. For its fourth quarter, the company recorded net sales of $3.53 billion, a 3% improvement ...
  6. Investing

    Bed Bath & Beyond Sued for Shorting Overtime Pay

    Home goods retailer Bed Bath & Beyond (NASDAQ: BBBY) is being accused of shorting employee wages by not paying them for overtime worked. Proposed class-action lawsuits have been filed in New ...
  7. Investing

    Bed Bath & Beyond Faces Growing Investor Anger

    Investors are losing their patience with how the management of Bed Bath & Beyond (NASDAQ: BBBY) is running the company. At Friday's annual shareholder meeting, they voted to approve two proposals ...
  8. Investing

    Common Clues Of Financial Statement Manipulation

    Search for the "bloody" fingerprints in accounting crimes.
  9. Investing

    3 Companies That Hate Debt Financing (CMG, BBBY)

    Learn how companies such as Chipotle, Bed Bath & Beyond, and Paychex are able to maintain impressive levels of growth without debt financing.
  10. Trading

    2 Retail Stocks That Could Be Due for a Rebound

    A look at whether retail stocks could be due for a rebound after falling sharply so far this year.
RELATED FAQS
  1. What does the law of diminishing marginal utility explain?

    Learn about some of the important economic insights that can be derived from applications of the law of diminishing marginal ... Read Answer >>
Trading Center