There's more to making money than picking winning stocks
In his book, Penny Stock Winners, R. Max Bowser, in a chapter with the same title as this post, makes a great analogy. He writes:
You need hits to win a [baseball] game, just as you need stocks that appreciate for successful investing. But, there's more to the picture.
A baseball team can have hits, but still be a loser. A market player can buy winning stocks, but still lose or make little money.
With baseball, you have to crank into your analysis the team's management, its defense, its pitching, etc.
With the buying of stocks, it's what you do after making purchases that determines your winning percentage. And, that is what we are concerned with. Specifically, selling.
This analogy makes a great point. In order to succeed, or win, you have to know when to sell. The best way to know when to get out is to have a strategic selling plan, which is the most important part of the Bowser Game Plan. Establishing a selling plan before you start investing is important.
Having a plan combats what prevents quite a few investors from being successful. In spite of what many believe, no one has a crystal ball, leaving all of us to speculate about what a specific stock will do. When we speculate, we set certain expectations. Max Bowser notes:
Too many expect every stock they buy to climb to $100 a share, or maybe at least to $20.
These expectations cause too many to hold on to certain stocks for too long.
By having specific sell parameters, you reduce much of your risk stemming from your expectations. The Bowser Game Plan terms the following rules for selling:
- Sell all holdings if the stock drops 50% from your purchase price;
- Sell half of your holdings when the stock doubles from your purchase price; and
- Sell the remaining half of your holdings after the stock drops 25% from its most recent high after doubling.
With our Game Plan, the most you are risking is half of your investment. If the stock doubles, you sell half of your holdings, which covers your initial cost. The remaining holdings are all profit. Selling the remainder after the stock drops 25% protects you from a sudden collapse in stock price, ensuring a decent profit.
Without these rules, you are left to guess when to sell based on certain observations, and more likely emotions and expectations.
There are many that advocate against a "mechanical rule," such as the Bowser Game Plan, but for someone who (a) doesn't have all day to observe his or her holdings, and/or (b) is a beginner to investing, a mechanical selling strategy is the way to go.
A mechanical selling plan creates discipline. And, in order to be a successful investor you must be disciplined. That way, no matter what the market is doing and no matter what your holdings are doing, you know what to do. Sticking to your plan will make or break you as an investor. Turning to the words of Max Bowser one last time:
The Selling Plan doesn't allow you to get out at the top, but it discourages you from panicking and selling when a stock has had a small increase.
It also eliminates the agony of trying to decide when to sell.
Making money in stocks is about more than picking the right ones. It is also about knowing when to divest of your non-performing holdings, and when to take your profits from your winning holdings. Find a plan and stick to it. You'll be a better investor for knowing when to sell.