Page 369 - How to Make Money in Stocks Trilogy

244 BE SMART FROM THE START

selling stocks that are not yet down 7% or 8% because you are raising money
to add to your best winners during clearly strong bull markets.
Remember: 7% to 8% is your absolute loss limit. You must sell without hes-
itation—no waiting a few days to see what might happen; no hoping the
stock will rally back; no need to wait for the day’s market close. Nothing but
the fact you’re down 7% or 8% below your cost should have a bearing on the
situation at this point.
Once you’re significantly ahead and have a good profit, you can afford to
give the stock a good bit more room for normal fluctuations off its price
peak. Do not sell a stock just because it’s off 7% to 8% from its peak price.
It’s important that you definitely understand the difference.
In one case, you probably started off wrong. The stock is not acting the
way you expected it to, and it is down below your purchase price. You’re
starting to lose your hard-earned money, and you may be about to lose a lot
more. In the other case, you have begun correctly. The stock has acted bet-
ter, and you have a significant gain. Now you’re working on a profit, so in a
bull market, you can afford to give the stock more room to fluctuate so that
you don’t get shaken out on a normal 10% to 15% correction.
Don’t chase your stock up too far when you’re buying it, however. The
key is timing your stock purchases exactly at breakout points to minimize
the chance that a stock will drop 8%. (See Chapter 2 for more on using
charts to select stocks.)

All Common Stocks Are Speculative and Risky

There is considerable risk in all common stocks, regardless of their name,
quality, purported blue-chip status, previous performance record, or cur-
rent good earnings. Keep in mind that growth stocks can top at a time when
their earnings are excellent and analysts’ estimates are still rosy.
There are no sure things or safe stocks. Any stock can go down at any time
. . . and you never know how far it can go down.
Every 50% loss began as a 10% or 20% loss. Having the raw courage to
sell and take your loss cheerfully is the only way you can protect yourself
against the possibility of much greater devastating losses. Decision and
action should be instantaneous and simultaneous. To be a big winner, you
must learn to make decisions. I’ve known at least a dozen educated and oth-
erwise intelligent people who were completely wiped out solely because
they would not sell and cut a loss.
What should you do if a stock gets away from you and the loss becomes
greater than 10%? This can happen to anyone, and it’s an even more critical
sign the stock positively must be sold. It was in more trouble than normal,