I am adamant about trying to not lose money. One of my basic premises is that if a stock drops then it is probably harder to ride that losing stock back to profitability then it is to find another stock that is already moving in a profitable direction.
One of Jim Cramer's sayings is that there is always a bull market somewhere. This is usually true and if one of your stocks is delivering you a loss, you need to find a company that is increasing in price and move your money there. As Charles Sizemore says below, it is a lot harder to recover your losses than it is to lose the money.
With market volatility picking up this past week, now is as good a time as any to review why it’s important to take your losses early.
Portfolio Loss Gain Required to Break Even (10%) 11% (20%) 25% (30%) 43% (40%) 67% (50%) 100% (60%) 150% (70%) 233% (80%) 400% (90%) 900% (97%) 3,233%
If you lose 10%-20% in a trade, it’s not that hard to recover. It only takes 11% – 25% to get back to where you started.
But if you lose 50%, you need 100% returns to get back to break even. Or if you lose 97% — as Bill Ackmanrecently did in Valeant Pharmaceuticals — you’d need a ridiculous 3,233% on your next trade just to get back to zero.
For the lion’s share of my portfolio, I take my losses early and buy a stock that is increasing in value.