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The Greatest Investment Lesson You'll Ever LearnBy
Monday, November 29, 2010
My friend Elwood is as smart as anyone, anywhere.
I met Elwood when I moved to the Northeast Florida coast a decade ago. Elwood broke the hillbilly stereotype. I learned a Southern accent doesn't mean you're uneducated (just like a New York accent doesn't necessarily mean you're pushy and abrasive).
When Elwood talks, I listen. Elwood stopped by my office the other day. It turns out, he just had his first "ten-bagger"... a stock he owned that went up tenfold. I asked him to tell me the story.
Steve, I'd been readin' your stuff. And I wanted to buy some silver to add to my gold. This was about two years ago. I decided on Silver Wheaton. I bought at $3.40 a share.
I did like you say to do... Once I was up by 100% on Silver Wheaton, I sold half. That way, I was playin' with the house's money. From there I let it ride, like you say.
Well, I've been ridin' it. And it's now up to $34 a share. I'm up tenfold. And based on your most recent write-up of Silver Wheaton, I'll keep ridin' it.
Elwood did it exactly right...
Look, the simple fact is, you'll never have a tenfold winner if you sell early. You have to let your winners ride.
The flip side is true as well... Never let a small loss turn into a big one.
This table tells the story. Let's say your investment loses 10% or 20%... or even 90% (in the left column). In the right column is how much your investment has to rise to get back to where it started...
If a stock is down 10%, it only has to recover 11% to get back to where it started. But if it's fallen 50%, it has to recover by 100% just to break even. Chances are downright terrible that will happen.
If you simply follow these two rules – let your winners ride and never let a small loss turn into a big one – you should make a fortune in your investments.
The trouble is, most people can't follow these rules. As soon as they see a little profit, they sell. But when they're in the red, they "hold and hope." That's doing exactly the opposite of these two rules.
You never want to put yourself in the position of having to hope a big loser doubles just to break even. You want to be like Elwood... cutting losers and riding winning positions as long as you can. That's how you make tenfold gains.
Good investing,
Steve
Further Reading:
"Never let a small loss become a big loss" is one of the most fundamental rules of making money in the markets. For a few others, check out these essays from our sister site, Growth Stock Wire:
A Trader's Best Friend: How many shares should you buy? Buy too much and you could suffer catastrophic damage. Buy too little and you're not capitalizing on your great idea.
How to Turn a 100% Gain into a 1,400% Gain: My friend missed the chance to make 14 times his money instead of one times his money. He missed the chance to ride a huge, multi-year trend to its fullest extent.
Market NotesNEW HIGHS OF NOTE LAST WEEK
CARBO Ceramics (CRR)... great call by Matt Badiali
National Oilwell Varco (NOV)... oil drilling rigs
Rosetta Resources (ROSE)... oil & gas
Schlumberger (SLB)... largest oil services company
Cameron International (CAM)... oil services
Denison Mines (DNN)... uranium
Uranium Resources (URRE)... uranium
Netflix (NFLX)... movie rentals
Amazon (AMZN)... online retail
Tiffany & Co (TIF)... jewelry
Cummins (CMI)... diesel engines
Under Armour (UA)... athletic apparel
Coca-Cola (KO)... mmm... sugar
Sam Adams (SAM)... mmm... beer
Panera Bread (PNRA)... mmm... bread
P.F. Chang's (PFCB)... mmm... dumplings
Chipotle Mexican Grill (CMG)... mmm... tacos
The Cheesecake Factory (CAKE)... mmm... cake
Darden Restaurants (DRI)... mmm... Olive Garden
NEW LOWS OF NOTE LAST WEEK
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