Page 380 - How to Make Money in Stocks Trilogy

When to Sell and Take Your Worthwhile Profits 255

have made a good deal more by holding a stock, but I would also have been
caught in the fall when the price of the stock collapsed.”
When asked if there was a technique for making money on the stock
exchange, Nathan Rothschild, the highly successful international banker, said,
“There certainly is. I never buy at the bottom, and I always sell too soon.”
Joe Kennedy, one-time Wall Street speculator and father of popular
former President John F. Kennedy, believed “only a fool holds out for the
top dollar.” “The object,” he said, “is to get out while a stock is up before
it has a chance to break and turn down.” And Gerald M. Loeb, a highly
successful financier, stressed “once the price has risen into estimated
normal or overvaluation areas, the amount held should be reduced
steadily as quotations advance.”
What all these Wall Street legends believed was this: you simply must get
out while the getting is good. The secret is to hop off the elevator on one of
the floors on the way up and not ride it back down again.

You Must Develop a Profit-and-Loss Plan
To be a big success in the stock market, you must have definite rules and a
profit-and-loss plan. I developed many of the buy and sell rules described in
this book in the early 1960s, when I was a young stockbroker with Hayden,
Stone. These rules helped me buy a seat on the New York Stock Exchange
and start my own firm shortly thereafter. When I started out, though, I con-
centrated on developing a set of buy rules that would locate the very best
stocks. But as you’ll see, I had only half of the puzzle figured out.
My buy rules were first developed in January 1960, when I analyzed the
three best-performing mutual funds of the prior two years. The standout
was the then-small Dreyfus Fund, which racked up gains twice as large as
those of many of its competitors.
I sent for copies of every Dreyfus quarterly report and prospectus from
1957 to 1959. The prospectus showed the average cost of each new stock the
fund purchased. Next, I got a book of stock charts and marked in red the
average price Dreyfus paid for its new holdings each quarter.
After looking at more than a hundred new Dreyfus purchases, I made a
stunning discovery: every stock had been bought at the highest price it had
sold for in the past year. In other words, if a stock had bounced between $40
and $50 for many months, Dreyfus bought it as soon as it made a new high
in price and traded between $50 and $51. The stocks had also formed cer-
tain chart price patterns before leaping into new high ground. This gave me
two vitally important clues: buying on new highs from basing patterns was
important, and certain chart patterns spelled big profit potential.