Page 1009 - How to Make Money in Stocks Trilogy

2 HOW TO MAKE MONEY IN STOCKS—GETTING STARTED

How to Protect Your Money

Talking about how to protect your money—how to avoid big losses—is not
the most exciting way to kick off a discussion about building wealth. But it’s
absolutely critical.

Job #1 in making money in stocks is to protect the money you
already have.

And you can do that just by following two basic rules. They will protect
you even when—in fact, especially when—the market becomes volatile and
slips into a downtrend.
When we go through the Selling Checklist later in the book, you’ll see
several common signals that tell you it’s time to lock in your gains or cut any
losses. Over time, you’ll become better and better at spotting those signs,
but for now—at a minimum—be sure to stick to these two rules. They’ll
help you safeguard your money as you learn new ways to grow it.

1. If a Stock Drops 7% to 8% Below What You Paid for It, Sell.
No Questions Asked.
This one simple rule puts a cap on potential losses—like having insurance to
protect you against whatever the market does. Simple and sensible.
You’ll find it’s much easier to grow your money if you follow this
rule. Instead of trying to make up for larger losses, you’ll be adding to and
compounding your gains.
I can’t emphasize enough how important this rule is.
Every investor—including legendary traders like Bill O’Neil—makes
mistakes. But successful investors quickly acknowledge those mistakes—
and cut their losses short. Always. You should do the same, and you can do
it by following this one simple rule.
See the Selling Checklist section for more on this rule—and how I
learned it the hard way.