Page 366 - How to Make Money in Stocks Trilogy

When You Must Sell and Cut Every Loss . . . without Exception 241

In search of a filament for his electric lamp, Thomas Edison carbonized and
tested 6,000 specimens of bamboo. Three of them worked. Before that, he had
tried thousands of other materials, from cotton thread to chicken feathers.
Babe Ruth worked so hard for his home run record that he also held the
lifetime record for strikeouts. Irving Berlin wrote more than 600 songs, but no
more than 50 were hits. The Beatles were turned down by every record com-
pany in England before they made it big. Michael Jordan was once cut from
his high school basketball team, and Albert Einstein made an F in math. (It
also took him many years to develop and prove his theory of relativity.)
It takes a lot of trial and error before you can nail down substantial gains in
stocks like Brunswick and Great Western Financial when they doubled in
1961, Chrysler and Syntex in 1963, Fairchild Camera and Polaroid in 1965,
Control Data in 1967, Levitz Furniture in 1970–1972, Prime Computer and
Humana in 1977–1981, MCI Communications in 1981–1982, Price Company
in 1982–1983, Microsoft in 1986–1992, Amgen in 1990–1991, International
Game Technology in 1991–1993, Cisco Systems from 1995 to 2000, America
Online and Charles Schwab in 1998–1999, and Qualcomm in 1999. These
stocks dazzled the market with gains ranging from 100% to more than 1,000%.
Over the years, I’ve found that only one or two out of ten stocks that I’ve
bought turned out to be truly outstanding and capable of making this kind
of substantial profits. In other words, to get the one or two stocks that make
big money, you have to look for and buy ten.
Which begs the question, what do you do with the other eight? Do you sit
with them and hope, the way most people do? Or do you sell them and keep
trying until you come up with even bigger successes?

When Does a Loss Become a Loss?

When you say, “I can’t sell my stock because I don’t want to take a loss,” you
assume that what you want has some bearing on the situation. But the stock
doesn’t know who you are, and it couldn’t care less what you hope or want.
Besides, selling doesn’t give you the loss; you already have the loss. If you
think you haven’t incurred a loss until you sell the stock, you’re kidding
yourself. The larger the paper loss, the more real it will become. If you paid
$40 per share for 100 shares of Can’t Miss Chemical, and it’s now worth $28
per share, you have $2,800 worth of stock that cost you $4,000. You have a
$1,200 loss. Whether you convert the stock to cash or hold it, it’s still worth
only $2,800.
Even though you didn’t sell, you took your loss when the stock dropped
in price. You’d be better off selling and going back to a cash position where
you can think far more objectively.