The Key To Successful Investing May Surprise You
I recently spent Memorial Day in Las Vegas on the tail-end of a road trip through Nevada and Utah. And while I didn't win big in Sin City, I'm happy to report that I did well enough to pay for a nice dinner that night with a little bit left to spare. (Hey, if Vegas doesn't get you one way, they get you another.)
As I was caught up in the action, I was reminded of how similar gambling and investing. It's often the things we focus on least that are the biggest markers of success in either endeavor.
Think about it... Just like in poker, for example, long-term success in investing is more about not losing than winning. Avoiding losing investments is perhaps even more important than finding big winners. And knowing when to sell is just as important as knowing what to buy.
My colleague Jimmy Butts recently touched on this idea in a recent issue of his premium newsletter, Maximum Profit :
"Ask Warren Buffett what it takes to be a successful investor and he'll likely tell you this:"Rule No. 1: Don't lose money. Rule No. 2: Don't forget Rule No. 1."Other notable investing legends offer similar advice. George Soros once quipped, "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."And of course, there's the well-known trading adage, "Cut your losses short and let your profits run."There are numerous other investing legends I could quote, but the common theme among many of them is risk management, or knowing when to sell. I've harped on this topic -- how selling is more important than buying -- in a number of Maximum Profit issues."
Look, I know this isn't nearly as sexy of a topic as telling you about a hot stock tip that will make you 100%. But it can mean all the difference when it comes to coming out ahead. For example, if you pick the wrong stock and find yourself down 50% on your investment, that stock will have to double in order for you to break even.
Good luck with that.
In his most recent issue, Jimmy cited an experiment done by trading psychologist Van Tharp. He teamed up with systems trader Tom Basso to illustrate the importance exits have on performance.
Tharp and Basso created a system that randomly selected stocks to buy and then used a quantifiable, trend-following exit rule to dictate when to sell. And even though there was absolutely no thought put into the buys whatsoever, thanks to the set of sell rules they had in place, the system still managed to be profitable.
That's why it's so important for you to build a set of rules for when to sell a stock.
For Jimmy's Maximum Profit system, that means anytime a stock's relative strength rating drops below 70 it's time to sell... no questions asked.
The goal of this rule is to ensure Jimmy and his subscribers are only holding stocks that are in an uptrend with strong momentum. These are the companies whose shares are most likely to outperform the market.
For a brief refresher, relative strength is just a quantitative measure of price trends. For Maximum Profit , when relative strength falls below 70, it means that stock is no longer outperforming at least 70% of all other companies in the market. That also means it's time to get out of that position -- no exceptions.
Take a look at how this sell rule has helped Jimmy and his subscribers capture the majority of the upside while avoiding losses...
Here's another example...
Having rules in place for knowing when to sell can be the difference between making and losing money in the market. So far, it's working out fantastically well for Maximum Profit readers who follow Jimmy's rules for buys and sells -- the two examples above are just the tip of the iceberg. It's no wonder then, that Maximum Profit has been the best-performing portfolio among StreetAuthority's premium newsletters over the past two-plus years. ( If you'd like to learn more about the Maximum Profit system, visit this link .)
We can't stress enough how important knowing when to sell can be. This goes for value investors, growth investors, options traders and systems traders. If you want to be successful in the market you need to have sell rules in place and stick to them.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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