Newbies need to learn when to hold ’em & fold ’em — & when to take half off the table
January 12, 2010

 

The two most important decisions every investor makes is deciding when to buy and when to sell.

A lot of times it’s the latter question that most newbie investors mess-up on the most.

In some ways, it’s easy to make to the decision when to buy. You simply do your due diligence and make an informed decision about an investment you like — and buy it.

But selling…. that’s a whole new animal unto itself.

It doesn’t matter whether the stock is up or down — newbies wrestle with the inability to make a decision and stick to it.

If they made a decision to buy a company, and the fundamentals change, and the stock starts to plunge — they can’t stand to bite the bullet and take a loss.

Which often leads to even greater losses.

Yet, they know in their core that it’s not just a momentary blip in the stock profile causing a pull-back — so they recognize it’s not a great buying opportunity, either.

Bottom line: If you own a stock, and it pulls back, and you’re not rushing to buy more because you know the fundamental reasons you bought it have changed — bite the bullet, take the loss, stand-up, and put your money into a company whose fundamentals you currently love.

On the other hand, I see just as much indecisiveness from newbie investors when they buy a stock, and it soars.

Let’s take Ford, for example.

If you read my column last May when I went against the grain where many on Wall Street were hinting that GM was going to be a great stock to snatch up because the government was talking about bailing out the auto giant — I told you that I preferred Ford.

If you liked Ford, too, and snatched some up for the $5.69 it was trading at and held on to it — you’ve doubled your investment.

Good for you.

But what are you going to do now?

Are you getting lazy and thinking about just leaving it there with a grand illusion that you just need to sit back and it will continue to soar?

I hope not.

Even if your due diligence tells you that this baby still has room to fly — you need to adhere to the golden rule “Buy low & sell high.”

It doesn’t mean “sell at its very highest.”

The very best traders on the Street know it’s a fool who tries to sell at a peak.

In other words, doubling your investment is good — don’t get greedy.

I’m not saying you should sell your full position — but what some of the best investors will do is to take half off the table.

In other words, let’s say they invested $10K in Ford back in May, and it’s now worth $20K. They’ll sell half it’s current worth — taking back their full out-of-pocket expense — and the $10K they’re still trading is “free” money that’s all profit.

But that’s just my personal choice — each investor has to find their own comfort zone.

As a sidenote to those asking why their posts don’t show up — I do not allow responses to be posted, because I don’t want anyone using this forum to hype or diss stocks. This forum is to encourage everyone to do their own due diligence.

Just remember the usual disclaimer: Don’t base any of your investment decisions on anything you read here. Do your own due diligence, or at least enough research to pick the right professional to do it for you.

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