Page 384 - How to Make Money in Stocks Trilogy

When to Sell and Take Your Worthwhile Profits 259

a possible six-month long-term capital gain. (Six months was the long-term
capital gains period at that time.) If a stock fell below its purchase price by
8%, I would sell it and take the loss.
So, here was the revised profit-and-loss plan: take 20% profits when you
have them (except with the most powerful of all stocks) and cut your losses
at a maximum of 8% below your purchase price.
The plan had several big advantages. You could be wrong twice and right
once and still not get into financial trouble. When you were right and you
wanted to follow up with another, somewhat smaller buy in the same stock
a few points higher, you were frequently forced into a decision to sell one of
your more laggard or weakest performers. The money in your slower-per-
forming stock positions was continually force-fed into your best performers.
Over a period of years, I came to almost always make my first follow-up
purchase automatically as soon as my initial buy was up 2% or 2½% in price.
This lessened the chance I might hesitate and wind up making the addi-
tional buy when the stock was up 5% to 10% or not add at all.
When you appear to be right, you should always follow up. When a boxer
in the ring finally has an opening and lands a powerful punch, he must
always follow up his advantage . . . if he wants to win.
By selling your laggards and putting the proceeds into your winners, you
are putting your money to far more efficient use. You could make two or
three 20% plays in a good year, and you wouldn’t have to sit through so many
long, unproductive corrections while a stock built a whole new base.
A 20% gain in three to six months is substantially more productive than a
20% gain that takes 12 months to achieve. Two 20% gains compounded in
one year equals a 44% annual rate of return. When you’re more experi-
enced, you can use full margin (buying power in a margin account), and
increase your potential compounded return to nearly 100%.

How I Discovered the General Market System
Another exceedingly profitable observation made from analyzing every one
of my money-losing, out-of-ignorance mistakes was that most of my market-
leading stocks that topped had done so because the general market started
into a decline of 10% or more. This conclusion finally led to my discovering
and developing our system of interpreting the daily general market aver-
ages’ price and volume chart. It gave us the critical ability to establish the
true trend and major changes of direction in the overall market.
Three months later, by April 1, 1962, following all of my selling rules had
automatically forced me out of every stock. I was 100% in cash, with no idea
the market was headed for a real crash that spring. This is the fascinating