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How I Always Keep My Subscribers in the MoneyBy
Thursday, February 10, 2011
A subscriber complained this week...
He didn't like my technique for always keeping my subscribers in the money.
So let me explain to you the time-tested technique I use... and then I'll answer his complaint.
Right now, 17 out of the 18 recommendations in my True Wealth newsletter are up. That's typical for our True Wealth recommended list... because of the one thing I do that always keeps my subscribers in the money.
"Treat your portfolio like a rose garden," my friend and colleague Alex Green says. "Trim your weeds. And let your roses fully bloom."
The problem is, most individual investors do exactly the opposite of Alex's rose garden... They trim their roses before they fully bloom. And they let their weeds fester.
What I mean is, as soon as most individual investors see any sign of a profit, they take it. They don't let the rose bloom. And instead of selling their losers, they hang on, letting them become bigger and bigger losers.
But think about what you've got... In time, by selling your winners and holding your losers, you'll simply have a portfolio full of losers.
Also, consider this: At the most basic level, if you want to make 10 times your money (like some of my subscribers made in shares of Seabridge Gold), you can't sell at the first sign of a 20% profit. You are only given the opportunity for a few 10-baggers in your career... You can't cut them off early.
The rule is an old one: Cut your losers and let your winners run.
My technique for doing this is a "25% trailing stop." It is incredibly simple. As soon as a stock falls by 25%, you sell it. For example, if you buy a stock at $10, and it falls to $7.50, you sell.
I call it a "trailing stop" because if the stock rises to $20, you'll sell at $15. The stock price rose. And your stop rose with it. It is a fail-safe... It keeps you from big losses, while letting your winners run.
But subscriber J.C. wrote in, saying, "Trailing stop percentages seem very crude to me."
J.C., I'm with ya. But here's why I recommend a 25% trailing stop, anyway...
First, it's simple to understand. This way, readers can't tell me, "I didn't sell because I didn't understand your exit strategy." If I made it any more complicated, I'm certain readers would look for excuses not to sell something that is down.
Second, it works. My publisher, Stansberry & Associates, recently commissioned a study of trailing stops... We asked a statistics firm to test whether or not adding trailing stops to a great stock picker's picks would help his performance. The study tested all this great stock picker's newsletter recommendations from 2002 through 2010. Here's what we found:
Using trailing stops of 16% or higher increased performance, almost uniformly, all the way up to a trailing stop level of 34%. That is, using trailing stops at any level between 16% and 34% increased performance.
Is there something magic about the 25% level? Not really... But I've used it in my newsletters, very successfully, for the 16 years I've been writing.
You could do all kinds of other things to plan your exit... a dollar stop, a time stop, an exit based on a technical indicator. The goal of all these is simply to keep you from hurting yourself, to keep you from turning a small loss into a big one.
I use the 25% trailing stop because it gives you a "no-thinking-required" way to do one of the two things you need to do to make a fortune in stocks: 1) cut your losers and 2) let your winners run.
So yes, J.C., trailing stop percentages are very crude. You are welcome to get much fancier, if you'd like. The important thing to me is my readers have an exit strategy.
You see, a successful trade has two parts: a good entry and a good exit. Most investors spend all their time thinking about the entry... what to buy and when. But they don't think at all about their exit strategy.
I believe by keeping it simple, I've gotten a higher percentage of my readers actually having a "fail-safe" exit strategy. In many cases, I believe it's the first time in their lives they've ever had an exit strategy, or even considered one.
What's your exit strategy? Do you have one?
If you don't, at the very least, I urge you to start using one now... That way, you're on the road to cutting your losers and letting your winners ride. You're on the path to making a fortune in stocks.
Good investing,
Steve
Further Reading:
It's one thing to know which exit strategies to use... It's another to know how to use them. Luckily, Steve has a friend who can help.
"Dr. Richard Smith earned his Ph.D. in math," Steve says. "More importantly for you, Richard developed a website that makes it incredibly easy for you to follow a rational exit plan..."
Find out the details here: Avoiding the Biggest Mistake Investors Make.
Market NotesTHIS KEY INVESTMENT FUND IS ABOUT TO HIT A NEW HIGH The financial bulls are one small step from going "over the top."
Around once a month, we've been checking in on the long "buyers vs. sellers" war in the big financial fund, XLF. It's one of the most important struggles in all of finance...
With large weightings in giants like JPMorgan, Goldman Sachs, Wells Fargo, American Express, and Bank of America, XLF rises and falls with America's ability to earn money, invest money, service debts, launch new businesses, and generally just "get along." For the past 18 months, bears who claim, "America is screwed financially" have battled bulls who claim, "Things are getting better" to produce a huge sideways trading pattern.
As you can see from today's chart, the bulls carry the day. Since August, XLF has put together a bullish series of "higher highs and higher lows" to come within a breath of its old high of $17 per share. Seeing this, we again point out that there are many things in the world worth worrying about (government debt and government debt being the two biggest), but as long as America's "financial backbone" is enjoying higher profits, rising book values, and rising stock prices, we have to say "things can't be that bad" out there.
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