Page 377 - How to Make Money in Stocks Trilogy

252 BE SMART FROM THE START

For Safety, Why Not Diversify Widely?

Wide diversification is a substitute for lack of knowledge. It sounds good,
and it’s what most people advise. But in a bad bear market, almost all of your
stocks will go down, and you could lose 50% percent or more in some stocks
that will never come back. So diversification is a poor substitute for a sound
defensive plan with rules to protect your account. Also, if you have 20 or 30
stocks and you sell 3 or 4, it won’t help you when you lose heavily on the rest.

“I’m Not Worried; I’m a Long-Term Investor,
and I’m Still Getting My Dividends”

It’s also risky and probably foolish to say to yourself, “I’m not worried about
my stocks being down because they are good stocks, and I’m still getting my
dividends.” Good stocks bought at the wrong time can go down as much as
poor stocks, and it’s possible they might not be such good stocks in the first
place. It may just be your personal opinion they’re good.
Furthermore, if a stock is down 35% in value, isn’t it rather absurd to say
you’re all right because you are getting a 4% dividend yield? A 35% loss plus
a 4% income gain equals a whopping 31% net loss.
To be a successful investor, you must face facts and stop rationalizing and
hoping. No one emotionally wants to take losses, but to increase your
chances of success in the stock market, you have to do many things you don’t
want to do. Develop precise rules and hard-nosed selling disciplines, and
you’ll gain a major advantage. You can do this.

Never Lose Your Confidence

There’s one last critical reason for you to take losses before they have a
chance to really hurt you: never lose your courage to make decisions in the
future. If you don’t sell to cut your losses when you begin to get into trou-
ble, you can easily lose the confidence you’ll need to make buy and sell deci-
sions in the future. Or, far worse, you can get so discouraged that you finally
throw in the towel and get out of the market, never realizing what you did
wrong, never correcting your faulty procedures, and giving up all the future
potential the stock market—one of the most outstanding opportunities in
America—has to offer.
Wall Street is human nature on daily display. Buying and selling stocks
properly and making a net profit are always a complicated affair. Human
nature being what it is, 90% of people in the stock market—professionals
and amateurs alike—simply haven’t done much homework. They haven’t