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Selling Checklist 143

Selling Checklist

Defensive Selling: To cut short any losses and protect remaining gains

Your Stock
■ ✔ Always sell if a stock drops 7%–8% below what you paid for it.
No questions asked!

Whether it’s the dot-com crash in 2000 or the financial crisis in 2008, we
hear horror stories of people who lose 30%, 50% or more of their money in
a severe bear market. That’s heart-wrenching—especially because it’s so
easy to avoid.
Just follow this one simple rule: Cut all losses at no more than
7%–8%.
It’s extremely effective and easy. No charts to read, no fancy technical
indicators to look for. If the stock drops 7%–8% below what you paid for it,
just get out!
So why doesn’t everybody follow this rule?
I think the first reason, frankly, is ignorance. Millions of people simply
don’t understand how market cycles work. And they don’t have any sell rules
to protect themselves.
The second reason is emotions.
We’re all human, and we don’t like to admit when we’re wrong. So
instead of quickly cutting a loss, the natural inclination for many investors is
to hold and hope it bounces back.
Big mistake! That’s how a little loss becomes a big one.
And here’s a paradox about selling: If you have a hard time selling a loss
when it’s small, it’ll be that much harder to sell as it gets bigger. That’s when
denial and delusion start to really kick in.
Believe me, I’ve been there. The following chart shows how I stubbornly
held on to a former leader called Namtai Electronics when I was just start-
ing out.