Random Stock Market Thoughts

Over the past few weeks I have been reading "The Battle for Investment Survival" by Gerald M. Loeb. In this book Loeb paints a broad picture of his investment philosophy in hopes of making the reader able to invest profitably. There were two things he said that were incredibly interesting to me: 1.) Don't buy a stock that you don't think will at least double and 2.) cut your losses quickly.

His reasoning behind #1, is that as investors we make a tremendous amount of mistakes and by purchasing a stock that we think will at least double, it gives us some chance that we might actually make some money on it. This makes sense, because I can think of countless times where I have bought the QQQQ or something similar in hopes of making a fraction of a point and ended up losing. This method gives an investor a margin of error that will without question benefit him. From now on I am going to try to follow this rule more closely.

Cut your losses quickly! This is the #1 mistake I have made this year. Prior to this year I followed it exclusively, but now I have become lax in my implementation of this rule. I think it was a combination of overconfidence and outside influences that led me away from this rule; however, now it is back in full force. It is so important to clear out your losing stocks I find it difficult to express it in words. Can you imagine how your portfolio would have done if you had sold that stock down 15% instead of riding it down 60%. You realize that once a stock goes down 50% it has to double to get back to break-even. Do you know how impossible that is to achieve? Don't ever let a stock fall more than 20% in your portfolio. It will do irreparable damage to it. Trust me 99 times out of 100 selling the stock is the right thing to do.