Commentary (Page 424)

Do you want to grow your investment portfolio?

That probably seems like a silly question. I doubt any investor under the age of 70 would answer the question about the desire to grow your investment portfolio with an emphatic, “No!” If you think of the opposite of that question (“Do you want your investment portfolio to get smaller?”) the original question becomes even more sillier.

But what if I told you that in order to grow your investment portfolio, you will quite often be wrong in your decisions. In fact, you need to be okay with having the wrong opinion on a given stock. You need to be okay with it only because you need to figure out what to do AFTER you are wrong.

When a company doesn’t perform the way you want it to perform, you need to cut your losses. Some investment advisers may suggest that you double down on the stock and buy it at a lower cost. That is likely a fools errand. Yes, you will lower your break-even point if the stock rebounds, but what if it doesn’t rebound. What happens if it continues to go down? In order to grow your investment portfolio, you need to cut your losses.

Understanding the stock market is as much of a study of human behavior as it is a mathematical exercise. You need to understand that the herd mentality of the market means that loser stocks tend to continue down until they hit a lower plateau.

In nearly every stock, there is a virtual floor and a virtual ceiling. In most cases, you can assume that the virtual floor and the virtual ceiling is the 52-week high and the 52-week low (this is a generalization). If the stock that you are doubling up on has broken through the floor, you don’t know where the bottom is! You will need to look at inflection points over the last 5 years to know the floor.

So how do you grow your investment portfolio after a drop?

Typically, you will not quickly recover a major drop in the value of a stock by staying with that stock.  You will need to cut your losses on that loser stock and invest in another stock that is increasing in value. At any given time (except for massive market corrections) there are stocks that are increasing in value while others are dropping in value. You need to be able to cut your losses to grow your investment portfolio and move to a growing stock.

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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 good stock that is currently increasing in value. A loser stock that is currently dropping in value is simply dragging your portfolio into the red.

If you have lost 7-10% of your value in a single stock, you need to cut your losses. Jim Cramer, the famed TV investment adviser, often says that it doesn’t matter where the company has been. It only matters where it is going. If the loser stock is still going or going sideways, you will need to sell the stock.

A loser stock that has lost a significant amount is not likely to be on the rebound very soon. You will probably need to find another stock that is increasing in value to make up the loss. Sitting on the loser stock and waiting for it to plateau and then regain its value is simply costing you money in lost opportunity costs. It is like throwing good money after bad.

This is even more obvious when you factor in the lost opportunity costs of the loser stock. While you were watching the loser stock decline in value, another great stock was actually increasing in value. So you didn’t just lose 7-10%, you actually lost an additional 5-10% since surely another stock was growing at that time. Except for general market corrections, such as what happened in October 2008, some stocks are going up and some stocks are going down. Sticking with a stock that is going down only adds to your losses.

Even the great stocks on my Watch List can be loser stocks at times. They can have a bad quarter or not react well to a current situation. It is important to constantly analyze if the company should get your trading money (it is going up and not down). It is equally important to know if it is time to exit the company completely because it has lost its way. For this reason, I will regularly review the companies on my Watch List and if they are no longer performing satisfactorily, I sell all my holdings.

So when do you know when it is time to sell a loser stock?

Simple – you need to understand technical analysis of stocks. You do not have to be a rocket scientist to do this, you simply need to read my book, “The Confident Investor“ to understand the basics. In my book I explain these basic tools.

Unfortunately, if you have not read my book you will probably not understand the details of my technique. You must be an owner of my book and registered on this site as a book owner to see this review. I strongly suggest that if you want to increase your confidence in your investments, you buy my book, “The Confident Investor” and learn how to Grow on Other People’s Money.

[s2If current_user_can(s2member_level1)] By watching the EMA in 5, 10, and 20 day increments, you will get an immediate feedback to the direction of the stock. The MACD based on 5, 10, and 20 will allow you to see the direction of the stock, as well as to sense if it is caught in a channel. Finally, the RSI will tell you if the market is buying the stock too quickly and it is danger of being oversold or overbought.

If you do not understand these indicators, please review them in my book. If that doesn’t help, send me a note.

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