Page 367 - How to Make Money in Stocks Trilogy

242 BE SMART FROM THE START

When you’re holding on to a big loss, you’re rarely able to think straight.
You get emotional. You rationalize and say, “It can’t go any lower.” However,
keep in mind that there are many other stocks to choose from where your
chance of recouping your loss could be greater.
Here’s another suggestion that may help you decide whether to sell: pre-
tend that you don’t own the stock and you have $2,800 in the bank. Then ask
yourself, “Do I really want to buy this stock now?” If your answer is no, then
why are you holding onto it?

Always, without Exception, Limit Your Losses
to 7% or 8% of Your Cost

Individual investors should definitely set firm rules limiting the loss on the
initial capital they have invested in each stock to an absolute maximum of
7% or 8%. Institutional investors who lessen their overall risk by taking large
positions and diversifying broadly are unable to move into and out of stocks
quickly enough to follow such a loss-cutting plan. This is a terrific advantage
you, the nimble decisive individual investor, have over the institutions. So
use it, or lose your edge.
When the late Gerald M. Loeb of E. F. Hutton was writing his last book
on the stock market, he came down to visit me in Los Angeles, and I had the
pleasure of discussing this idea with him. In his first work, The Battle for
Investment Survival, Loeb advocated cutting all losses at 10%. I was curious
and asked him if he always followed the 10% loss policy himself. “I would
hope,” he replied, “to be out long before they ever reach 10%.” Loeb made
millions in the market.
Bill Astrop, president of Astrop Advisory Corp. in Atlanta, Georgia, sug-
gests a minor revision of the 10% loss-cutting plan. He thinks that individ-
ual investors should sell half of their position in a stock if it is down 5% from
their cost and the other half once it’s down 10%. This is sound advice.
To preserve your hard-earned money, I think a 7% or 8% loss should be
the absolute limit. The average of all your losses should be less, perhaps 5%
or 6%, if you’re strictly disciplined and fast on your feet. If you can keep the
average of all your mistakes and losses to 5% or 6%, you’ll be like the foot-
ball team on which opponents can never move the ball. If you don’t give up
many first downs, how can anyone ever beat you?
Now here’s a valuable secret: if you use charts to time your buys precisely
off sound bases (price consolidation areas), your stocks will rarely drop 8%
from a correct buy point. So when they do, either you’ve made a mistake in
your selection or a general market decline may be starting. This is a big key
for your future success.