The Most Useful (And Maybe The Hardest) Rule For Investors To Follow
I’ve seen it happen to investors before. Heck, I’ve even been a victim of it myself.
But it can be especially dangerous in times like these.
I’m talking about getting too cute when the good times are rolling…
When things are going great — in any aspect of life, but most notably in investing — it’s easy to ignore the fundamentals. The very things that got us here. We begin to take bigger risks, start investing in things outside of our wheelhouse and simply forget the basics of what it takes to succeed.
And when the day of reckoning arrives, we freeze. Or worse, we panic and forget everything we’ve learned about investing. We forget the basics.
Don’t fall victim to this. Instead of panicking when the bad times come (because they will), you need to keep it simple. Keep your emotions in check, and remember the basic tenets of successful investing.
The reason I want to go over this today is simple. Getting a firm grasp on these ideas will give you a greater chance of doing the right thing when times get tough. It could possibly save you not only hundreds of thousands of dollars, but restless nights of sleep.
We all know to call 911 in an emergency or to “stop, drop and roll” if we’re on fire. But we also need to know what to do when all hell is breaking loose in the market.
I’ve shared my 3 keys for successful investing before. So I won’t spend a lot of time on all three today. But I think they’re worth repeating.
1) Have an exit strategy in place.
2) Understand and use position sizes.
3) Keep your emotions out of the market.
Today, I want to spend some time on No. 1. Again, longtime readers know that I always harp on this. But you know what? I do this because it’s one of the hardest for investors to execute and understand. With that said, let’s dive in…
The Most Useful, But Hardest Rule To Follow
“Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong — not taking the loss — that is what does the damage to the pocket book and to the soul.” — Jesse Livermore, Reminiscences of a Stock Operator
For those who aren’t familiar, Jesse Livermore was one of the most well-known traders on Wall Street in the early part of the 20th century. His story is both fascinating and tragic. This is a guy who made a fortune and lost it many times over — so he ought to know what he’s talking about in the above quote.
If you’ve been investing for a while, it’s no secret that one of the hardest things to figure out is the right time to sell. This is especially true for a losing position. A stock goes down, and we tell ourselves that as soon as it gets back to even, we will sell… only to see the stock sink lower. Then we tell ourselves that we are “buy and hold” investors in it for the long haul. As the stock continues to sink, we wonder how much lower it can really go. We can’t sell because selling admits failure, and we’re hard-wired to not accept failure.
Meanwhile, this stock becomes a major black eye in your portfolio, bringing discouragement and frustration. It really comes down to swallowing your pride, setting your ego to the side, and cutting your loss.
Most investors will begin to ignore that loser. Pretty soon, you’re sitting at a 20%, 30%, 50% loss, or worse.
But I’m going to let you in on a little secret… having an exit plan in place, and executing it, can be more satisfying than booking a solid winner.
Over at Capital Wealth Letter, we once owned Qualcomm (Nasdaq: QCOM). This stock did absolutely nothing for the next two years after we added it. I finally cut it from the portfolio for a modest loss of 18.6%. Despite posting more than our fair share of winners in Top Stock Advisor, this is not one of them. We got this one wrong.
Now, QCOM has since gone on to bigger and better things. But guess what? So have we? I’m glad we got rid of that dud. I only wish we had done it sooner.
If you can learn to be happy with cutting a loser from your portfolio, you’ll be better for it. Trust me.
Remember, to recover from a 50% loss, we need to book a 100% winner just to break even. And triple-digit winners aren’t exactly easy to come by in a short period. This is why it’s important to have some sort of stop-loss, trailing-stop, or “uncle” point when you’re investing.
Figure out the most you are willing to lose on a stock before you even enter the trade. This will help you satisfy rule number one from above — have an exit strategy in place.
The bottom line is this…
If you want to make money investing — and not get caught unprepared — then don’t forget the basics. Be sure to have an exit plan in place.
P.S. There’s a “strange” area of the market that I’m laser-focused on right now… and it could make investors an absolute killing in the months ahead…
I’m talking about outer space. That’s right: There’s a new space race that’s taking shape right now. And this time around, you and I can profit from it… And before you call me “crazy,” you should know that dozens of billion-dollar companies are already in the race to commercialize space — not just Elon Musk with his company, SpaceX.
In fact, I’ve found a secret “backdoor” way we can piggyback on the success of one of SpaceX’s latest projects.