Mike's 10 Must Follow Rules for Making Consistent Profits in the Stock Market
Rule #5: Never Marry a Stock
I always like to say that you should never marry a stock because you won’t like the divorce!
This is meant to be both funny and deadly accurate. Too many investors get into a stock because they love the company or the stock has made them a lot of money. They just can't bear to sell it. They got into the stock for all the right reasons, and perhaps, nothing has fundamentally changed with the company. But, when the stock's price begins to cycle lower, instead of capturing their unrealized gains; they hang onto the stock. Sometimes they hang onto a stock until they have lost all they had ever made and much, much more. They were 'married' to the stock; and, they did not want to get a divorce (sell it). So, they waited and waited as the stock's price sank lower and lower. Finally, at the bottom (usually), they sell the stock because they could not stand the pain any longer; at which time, the stock immediately began to move back up in price. This story repeats itself over-and-over-and-over. It should never be your story.
I have a few sub-rules that if you follow, you can be sure to not even get engaged, much less married to a stock. Here are those sub-rules:
- Don't override your stop loss strategies. If your stop loss strategy says sell, then sell. If it says cover, then cover. Don't look back. For most investors, the cost of a trade is only $5... why not get out of that stock when your stop loss tells you to; and then put that money to work in a much more attractive position?
- Never lower a stop loss unless you have a rule for lowering (e.g., Stock moves from a trade to a long-term strategy). Don't let your emotions tell you "It's different this time." It is almost NEVER different. Follow your rules; not your emotions.
- Never, never average down. I have heard advisors and investors say, "Great... my stock is now cheaper. I'll just buy some more and average down my cost." The only time I will ever buy a stock a lower price than my originating purchase is when I have decided to build my position out of 2 or 3 trades, over several weeks. Then, at the start of the buy-in, I decide what my lowest price will be before I say I made an error in the stock. However, it is rare that I will add to a position when the price has moved against me... very rare.
- Switch to an aggressive stop loss mode when:
- The Sector moves against you (see Rule 4, above), or
- The Industry moves against you (see Rule 4, above).
Remember... 'Hope is not an investment strategy!'
Continue to Rule #6, Watch for Insider Buying. |
