Page 368 - How to Make Money in Stocks Trilogy

When You Must Sell and Cut Every Loss . . . without Exception 243

Barbara James, an IBD subscriber who has attended several of our work-
shops, didn’t know anything about stocks when she started investing after 20
years in the real estate business. She first traded on paper using the IBD
rules. This worked so well that she finally had the confidence to try it with
real money. That was in the late 1990s, when the market seemed to have
only one direction—up. The first stock she bought using the IBD rules was
EMC. When she sold it in 2000, she had a 1,300% gain. She also had a gain
of over 200% in Gap. Ten years after her start, with the profits she made
using IBD, she was able to pay off her house and her car.
And thanks to the 7% rule, Barbara can take advantage of the market
once it improves. Before the market started to correct in the fall of 2007, she
had bought three CAN SLIM stocks—Monolithic Power, China Medical,
and St. Jude Medical. “I bought them all at exactly the right pivot point, and
I got forced out of all three as the market started to correct in July and
August,” she says. “I am happy to lose money when it’s only 7% or 8%. If it
hadn’t been for the sell rules, I would have lost my shirt. And I wouldn’t
have resources for the next bull market.”
Here’s what another IBD subscriber, Herb Mitchell, told us in February
2009: “Over and over again, the buy and sell rules—especially the sell
rules—have been proven to work. It took me a couple of years to finally get
it through my head, but then the results started to show. I spent most of
2008 on the sidelines, and I now get compliments from friends who say that
they lost thousands—50% or more—in their IRA accounts while I had a 5%
gain for the year. I think I should have done better, but you live and learn.”
Also, there’s no rule that says you have to wait until every single loss
reaches 7% to 8% before you take it. On occasion, you’ll sense the general
market index is under distribution (selling) or your stock isn’t acting right
and you are starting off amiss. In such cases, you can cut your loss sooner,
when the stock may be down only one or two points.
Before the market broke wide open in October 1987, for example, there
was ample time to sell and cut losses short. That correction actually began
on August 26. If you’re foolish enough to try bucking the market by buying
stocks in bearish conditions, at least move your absolute loss-cutting point
up to 3% or 4%.
After years of experience with this technique, your average losses should
become less as your stock selection and timing improve and you learn to
make small “follow-up buys” in your best stocks. It takes a lot of time to
learn to make follow-up buys safely when a stock is up, but this method of
money management forces you to move your money from slower-perform-
ing stocks into your stronger ones. I call this force-feeding. (See “My
Revised Profit-and-Loss Plan,” pages 258–259 in Chapter 11.) You’ll end up