Sometimes the best offense is a great defense - right?
Let’s talk about Selling Stocks.
In sports, any team that focuses only on the offense and has a poor defense will rarely win a championship – right? Well this is the same thing about the stock market!
As a stock investor, it will be impossible for you to win if you do not develop a proven defense strategy. In other words, you have to predetermine in advance, how you intend to protect yourself from losses.
This should not come as a surprise, but if you invest in stocks, you will make numerous mistakes - both in your selection and timing. These poor decisions lead to losses!
The whole secret to winning in the stock market is to lose the least amount possible when you're not right.
In other words, in order to win, you must recognize when you may be wrong and sell without hesitation. This way you cut short your losses. This is not easy! I cannot tell you the times that I have held on to a stock – in the hope that it will turn positive again - and in the process lost money.
Learning the important of Selling Stocks is imperative!
How can you tell when you may be wrong? That's easy. When the price of the stock drops below your purchase price!
Each point your stock falls below your cost increases both the probability that you are mistaken, and the “price” you will pay for being incorrect.
Are Successful People Lucky or Always Right?
There are many people who think that just because a person is successful – they are lucky or right most of the time. This cannot be further from the truth. Successful people, like everyone else – make mistakes. Their success is because they have worked hard, not because they have been lucky!
They succeed in spite of their mistakes because they try harder and more often than the average person does. Ask Bill Gates or Warren Buffet! These guys weren’t overnight successes. It took time – and effort!
I have found over the years that only two to three – sometimes four stocks out of every 10 that I purchased usually turned out to be truly outstanding and capable of making substantial profits. This means in order to get the two or three, you have look for and buy 10 different stocks.
So how do you minimize your losses on the other six or seven stocks?? You have to have a successfully strategy for Selling Stocks!
Suppose you paid $50 for a stock two years ago. Today it is worth $64. You may sell it because you've made a profit. But what does the price you paid for that stock two years ago have to do with its worth today—or whether it should be held or sold now?Suppose you paid $40 for the same stock six months earlier and, therefore, have a loss today. Does this change its future potential?
What you paid for a stock a year ago or whether you have a profit or loss has very little to do with its future potential.
When Does a Los Become Loss?
When a stock investor makes the following statement, "I can't sell this stock because I don't want to take a loss," the assumption the investor is making is that what they want as an investor has some bearing on the situation.
It does not! The stock does not know who you are, and it doesn't care what you hope or want.
Furthermore, you may believe that if you sell the stock you will be taking a loss; WRONG! selling doesn't give you the loss; you already have it.
This is why understanding the concept of Selling Stocks is critical!
For example, if you purchase a stock for $40 per share for 100 shares that’s $4000 spent. Two months later it’s worth $30 per share – meaning you now have $3000 worth of the same stock – a loss of $1000.
Whether you convert this stock to cash or hold the stock, it is only worth $3000. You took your loss as this stock dropped in price even though you didn't sell; now you will probably be better off selling the stock and going back to a cash position. You can think more objectively with cash in your stock account than you can if you're worrying about a stock that has lost money for you.
Here's another way that you can look at this that may help you make this decision - pretend you don't own the stock and you have $3000 in the bank. Then ask yourself this question, "Do I really want to buy this stock now?" If your answer is "no," then why are you holding it?
Let us say you owned a clothing company. Would you ever go to your buyer and say, "The red dresses are all sold out - the yellow ones don't seem to have any demand, but I still think they're good and besides, yellow is my favorite color, so let's buy some more of them anyway"?Of course not!
As a merchandiser who wants to survive the retail business, you would look at the situation objectively and say, "We sure made a mistake. We'd better eliminate the yellow dresses. Mark them down 10%. Let's have a sale. If they don't sell at that price, mark them down 20%. Let’s get some money back and purchase more of the hot-moving red dresses that are in demand." This is common sense in a retail business.
Do you do this with your investments? Why not?
The moral of this lesson? ALWAYS define what your potential profit and possible loss will be. This is only logical: you would not buy a stock if there were potential profit of 20% and potential loss 80%, would you?
How will you know this is not the situation when you buy a stock if you do not attempt to define these factors and operate according to well-thought-out Selling Stocks rules?
Do you have any specific selling rules, or are you flying blindly?
I suggest that for every stock you purchase, you write down at what price you will sell if you have a loss, and at what price your profit potential gain should be if you make money!
This is not the standard or norm by any chance, but to preserve your hard-earned money, I think 7% or 8% should be the absolute limit. Your overall average of all losses should be less, perhaps 5% or 6% if you are strict and fast on your feet.
Once you get to that point, DO NOT HESITATE – Sell! Sell! Sell!
Don’t give it a few more days – the fact that you are down 7% or 8% below your cost should be reason to sell – you don't need any other reason!
Is it possible to sell that the stock immediately turns around and goes up? Probably!
If you bought insurance on your car last year and did have an accident, did you waste your money? Are going to buy the same insurance this year? Of course you are!
Did you buy insurance on your home last year? If your home did not burn down last year, are you upset because you made a bad financial decision? Ofcoure not!
You don't buy home insurance because you know your house is going to burn down. You buy it just in case, to protect you from the remote possibility of a serious loss. That’s the same thing for an investor who cuts losses quickly and closely – you are simply choosing to protect against the possible chance of a larger potentially devastating loss from which it may not be possible to recover.
When Vmware IPOed in 2007 I bought it at $50 a share and rode it all the way to $110. I sold and made a huge profit. About 2 weeks later it dipped to $80 and I thought I could buy it and ride it to maybe $120, which had been its 52 week high. It went up for a day or two and then begun descending. At that time I was with a brokerage company that did not give me the option to create OTO’s (Three orders in one). I was also travelling on business out of the country and did not have access to email for three days. In addition, I decided this was a minor correction and that the stock would soon resume it’s uptrend.
It never did! By the time I decided to sell I had lost over $10 per share!
Remember - the best offense is a great defense!
Understand the concept of Selling Stocks and use this to your advantage.