Page 314 - How to Make Money in Stocks Trilogy

L = Leader or Laggard: Which Is Your Stock? 191

In June 1972, an otherwise capable institutional investor in Maryland
bought Levitz Furniture after its first abnormal price break—a one-week
drop from $60 to around $40. The stock rallied for a few weeks, then rolled
over and broke to $18.
In October 1978, several institutional investors bought Memorex, a lead-
ing supplier of computer peripheral equipment, when it had its first unusual
price break and looked to be a real value. It later plunged.
In September 1981, certain money managers in New York bought Dome
Petroleum on a break from $16 to $12. To them, it seemed cheap, and a
favorable story about the stock was going around Wall Street. Months later,
Dome sold for $1.
Institutional buyers snapped up Lucent Technologies, a Wall Street dar-
ling after it was spun off from AT&T in the mid-1990s, after it broke from
$78 to $50. Later that year, it collapsed to $5.
Also in 2000, many people bought Cisco Systems when it dropped to $50
from its early-year high of $82. The maker of computer networking equipment
had been a huge winner in the 1990s, when it soared 75,000%, so it looked
cheap at $50. It went to $8 and never got back to $50. In 2008, eight years after
those buyers saw value at $50, Cisco was selling for only $17. To do well in the
stock market, you’ve got to stop doing what got you into trouble in the past and
create new and far better rules and methods to guide you in the future.
Suppose Joe Investor missed buying Crocs, the footwear company, at a
split-adjusted $15 as it came out of the perfect cup-with-handle pattern in
September 2006. Suppose he also missed the next cup pattern in April 2007
at 28. Then the stock roars up to $75 by October, with earnings up 100%
every quarter. A month later, however, the stock drops to 47, and Joe sees
his chance to get into this big winner that he missed all the way up and that’s
now at a cheaper price. But the stock just keeps falling, and by January 2009
it’s trading at $1. Buying stocks on the way down is dangerous. You can get
wiped out. So stop this risky bad habit.
How about buying a blue chip, a top-flight bank that’s a leader in its
industry—Bank of America? In December 2006, it was $55 a share, but you
could have gotten it cheaper a year later at $40. Another year later, however,
it had plunged to $6. But you’re still a long-term investor, getting your 4-
cent dividend.
This is why I say don’t buy a supposed good stock on the way down and
why we recommend cutting all losses at 7% or 8%. Any stock can do any-
thing. You must have rules to protect your hard-earned money. We all make
mistakes. You must learn to correct yours without vacillating.
None of the pros or individual investors who owned or bought Cisco,
Crocs, or BofA when they were falling recognized the difference between