Page 370 - How to Make Money in Stocks Trilogy

When You Must Sell and Cut Every Loss . . . without Exception 245

so it fell faster and further than normal. In the market collapse of 2000,
many new investors lost heavily, and some of them lost it all. If they had just
followed the simple sell rule discussed earlier, they would have protected
most of their capital. Investing is not gambling, it is investing.
In my experience, the stocks that get away from you and produce larger-
than-normal losses are the truly awful selections that absolutely must be sold.
Something is really going wrong with either the stock or the whole market,
and it’s even more urgent the stock be sold to avoid a later catastrophe.
Keep in mind that if you let a stock drop 50%, you must make 100% on
your next stock just to break even! And how often do you buy stocks that
double? You simply can’t afford to sit with a stock where the loss keeps get-
ting worse. Get out.
It is a dangerous fallacy to assume that because a stock goes down, it has
to come back up. Many don’t. Others take years to recover. AT&T hit a high
of $75 in 1964 and took 20 years to come back. Also, when the S&P 500 or
Dow declines 20% to 25% in a bear market, many stocks will plummet 60%
to 75%.
When the S&P dives 52%, as it did in 2008, many stocks fell 80% to 90%.
Who would have projected General Motors would sell for $2 a share, down
from $94? The auto industry is important to the United States, but it will
require a serious, top-to-bottom restructuring and will possibly have to go
through bankruptcy if it is to survive and compete effectively in the new
highly competitive world market. For 31 years, from 1977 to 2008, GM
stock’s relative price strength line declined steadily. What will GM do in the
future if India or China sells cars in the United States that get 50 miles per
gallon and have a much lower price?
The only way to prevent bad stock market losses is to cut them without
hesitation while they’re still small. Always protect your account so that you
can live to invest successfully another day.
In 2000, many new investors incorrectly believed all you had to do was
buy high-tech stocks on every dip in price because they would always go
back up and there was easy money to be made. This is an amateur’s strategy,
and it almost always leads to heavy losses. Semiconductor and other tech-
nology stocks are two to three times as volatile and risky as others. So if
you’re in these stocks, moving rapidly to cut short every loss is even more
essential. If your portfolio is in nothing but high-tech stocks, or if you’re
heavily margined in tech stocks, you are asking for serious trouble if you
don’t cut your losses quickly.
You should never invest on margin unless you’re willing to cut all your
losses quickly. Otherwise, you could go belly-up in no time. If you get a mar-
gin call from your broker (when you’re faced with the decision to either sell