Don’t be a loyal investor to an ailing company

loyal investor photoI am not a loyal investor.

I firmly believe that if a stock is going down I should not ride it back up again in order to recover my losses from that particular stock. This logic makes sense because other stocks are likely going up while the bad stock is going down.

If you follow the major indices on any given day such as the S&P 500 or NASDAQ Composite, you will see that at least 25% of the stocks are up while a least 25% of the stocks are going down. Why would you be a loyal investor and ride the stock down? Your money is the same regardless of the chosen stock that used as an investment.

There are no rewards to be a loyal investor. The investor that is holding a stock for one week and rides it for a 5% gain is not penalized or rewarded more than the loyal investor that is holding the stock for a year or 5 years after earning the profit. The market simply does not reward you to be loyal; it rewards you for being correct. Yes, there may be some tax implications but the tax on zero profit is zero. Making money will increase your taxes but only because you are making money!

You should be only investing with a broker that is charging a nominal amount for your stock transactions. As long as your profit exceeds the cost of the trades to go in or out of the stock, then you are financially ahead.

Stock that has dropped significantly for several days or week is not likely to immediately rebound and recover lost ground. The stock may eventually grow, but potentially will take weeks or months to recover from a 10% loss. You are much more likely to recover the 10% loss by investing your money in another stock that is currently growing.

A momentum investor is rarely a loyal investor. A momentum investor is an investor that doesn't try to out-think the market, but rather tries to ride the wave of whatever it is hot at the time. I have no patience to ride the stock down, but rather I would prefer to ride stocks up. I am not a loyal investor that patiently waits for the company to fix its problems.

This strategy depends on technical indicators to allow me to analyze great companies and their momentum at any given time. This strategy is exactly what I describe in my book The Confident Investor.

Don't be a loyal investor. You need to sell a loser stock. Don't wait for it to rebound. It is much easier to recover from a losing position by investing in a stock that is increasing in value then being a loyal investor and waiting for an ailing stock to get healthy.

You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.

Photo by blue_quartz

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