Page 372 - How to Make Money in Stocks Trilogy

When You Must Sell and Cut Every Loss . . . without Exception 247

the story is: never argue with the market. Your health and peace of mind are
always more important than any stock.
Small losses are cheap insurance, and they’re the only insurance you can
buy on your investments. Even if a stock moves up after you sell it, as many
surely will, you will have accomplished your critical objective of keeping all
your losses small, and you’ll still have money to try again for a winner in
another stock.

Take Your Losses Quickly and Your Profits Slowly
There’s an old investment saying that the first loss in the market is the small-
est. In my view, the way to make investment decisions is to always (with no
exceptions) take your losses quickly and your profits slowly. Yet most
investors get emotionally confused and take their profits quickly and their
losses slowly.
What is your real risk in any stock you buy when you use the method
we’ve discussed? It’s 8%, no matter what you buy, if you follow this rule reli-
giously. Still, most investors stubbornly ask, “Shouldn’t we sit with stocks
rather than selling and taking a loss?” Or, “How about unusual situations
where some bad news hits suddenly and causes a price decline?” Or, “Does
this loss-cutting procedure apply all the time, or are there exceptions, like
when a company has a good new product?” The answer: there are no excep-
tions. None of these things changes the situation one bit. You must always
protect your hard-earned pool of capital.
Letting your losses run is the most serious mistake almost all investors
make. You must accept the fact that mistakes in stock selection and timing
are going to be made frequently, even by the most experienced of profes-
sional investors. I’d go so far as to say that if you aren’t willing to cut short
and limit your losses, you probably shouldn’t buy stocks. Would you drive
your car down the street without brakes? If you were a fighter pilot, would
you go into battle without a parachute?

Should You Average Down in Price?
One of the most unprofessional things a stockbroker can do is hesitate or fail
to call customers whose stocks are down in price. That’s when the customer
needs help the most. Shirking this duty in difficult periods shows a lack of
courage under pressure. About the only thing that’s worse is for brokers to
take themselves off the hook by advising customers to “average down” (buy
more of a stock that is already showing a loss). If I were advised to do this,
I’d close my account and look for a smarter broker.