Page 1162 - How to Make Money in Stocks Trilogy

Selling Checklist 147

the farm it’ll be one of those rare exceptions? Even if it does bounce back,
do you want to start that new run with the profits you locked in when the
downtrend began—or down 72%?
Look again at the chart above that shows the gains you need to make
up for past losses. If you hold on as a former leader drops 75%, you need
a 300% gain just to break even! So if that stock falls to $20, you won’t
make a dime in profit until it climbs back above $80.
So let’s review . . .
You can hold as your stock loses most of its value, with only a 1 in 8
chance it’ll come back to be a big winner again.
Or you can lock in your profits using simple sell rules.
I wish all choices in life were that easy!

Don’t Forget the Opportunity Costs

Holding a stock as it sheds a large percentage of its value does more than
just hand you a big loss. You also have to consider the opportunity costs.

• Your goal is to compound profits, not recoup losses.
Let’s say you made a 25% gain on a $10,000 position. You’d now have
$12,500 to invest in another stock. If you make 20% on your next trade,
you now have $15,000—a total gain of 50%. That’s the beauty of com-
pounding.
But . . . you’d be in a very different position if you ignored both the
20%–25% profit-taking rule and the 7%–8% sell rule and took a 50% loss
before you sold. You’d now only have $5,000 to invest (a 50% loss)—and
you’d need a 100% gain just to recoup your losses. Investors who do that
take a loss and forfeit the opportunity to compound good gains.
• The big money is made in the new crop of leading stocks.
If only 1 in 8 former leaders comes back to lead again, what does that tell
you? That in every bull market cycle, new names appear. And these new
leaders—not the old ones—are the stocks most likely to double or triple
in price.
So if you take a big loss in a former leader and continue to hold it, it
could take years before you recoup that loss—if you ever do. And in the
meantime, you’d be missing out on the huge profits the current leaders
are serving up.