Page 365 - How to Make Money in Stocks Trilogy

240 BE SMART FROM THE START

awful if you’re not disciplined and careful. No matter how smart you are,
how high your IQ, how advanced your education, how good your informa-
tion, or how sound your analysis, you’re simply not going to be right all the
time. In fact, you’ll probably be right less than half the time! You positively
must understand and accept that the first rule for the highly successful indi-
vidual investor is . . . always cut short and limit every single loss. To do this
takes never-ending discipline and courage.
Marc Mandell of Winning on Wall Street has been reading Investor’s
Business Daily since 1987. He likes it for its many moneymaking ideas and
its emphasis on risk-management strategies. “Lose small and win big,” he
believes, “is the holy grail of investing.”
Baruch’s point about cutting losses was driven home to me by an account
that I managed back in 1962. The general market had taken a 29% nose-
dive, and we were right on only one of every three commitments we had
made in this account. Yet at the end of the year, the account was ahead. The
reason was that the average profit on the 33% of decisions that were cor-
rect was more than twice the average of the small losses we took when we
were off-target.
I like to follow a 3-to-1 ratio between where to sell and take profits and
where to cut losses. If you take some 20% to 25% gains, cut your losses at
7% or 8%. If you’re in a bear market like 2008 and you buy any stocks at all,
you might get only a few 10% or 15% gains, so I’d move quickly to cut every
single loss automatically at 3%, with no exceptions.
The whole secret to winning big in the stock market is not to be right all
the time, but to lose the least amount possible when you’re wrong.
You’ve got to recognize when you may be wrong and sell without hesita-
tion to cut short every one of your losses. It’s your job to get in phase with
the market and not try to get the market in phase with you.
How can you tell when you may be wrong? That’s easy: the price of the
stock drops below the price you paid for it! Each point your favorite brain-
child falls below your cost increases both the chance you’re wrong and the
price you’re going to pay for being wrong. So get realistic.

Are Successful People Lucky or Always Right?
People think in order to be successful, you have to be either lucky or right
most of the time. Not so. Successful people make many mistakes, and their
success is due to hard work, not luck. They just try harder and more often
than the average person. There aren’t many overnight successes; success
takes time.