You've Gotta Have a Plan

“Thanks for the plan, Steve...” a longtime family friend and True Wealth reader wrote me this weekend...

The market had fallen.  And our friend was unsure what to do.  Actually, he knew what to do, but he was afraid to follow it.

He’d created a plan this year, based on what he’d learned from my newsletter over the years.  He’d promised himself he was going to methodically cut his losers, and let his winners ride.  This way, he’d never risk a big loss of his investment money.

His strategy hadn’t been tested, until last week.  And he found that when the time came to actually sell, it was hard...

“I bit the bullet and sold,” he told me in his email.  “To my surprise, it didn’t hurt that much. It sort of felt good putting the profit in the bank.”

Then he said: “The game is unreal.  But the money, that’s real.”

I don’t know what he owned or sold.  It doesn’t matter.  What matters is that he finally has a plan... HE KNOWS WHEN HE’LL SELL.  He limits his worst-case scenario.  And that puts him head and shoulders above 99% of investors, who tend to sell at the worst possible times.

Most people don’t think about it this way, but it’s important that you do...

My family friend is right, it is a game.  Think of it like poker.  You’ve got to know how to play the game, but the game isn’t about the cards you’re dealt.  The game is about how you manage your money... Knowing when to play it safe, when to bet big, and most importantly, when to fold.

Poker is not a card game, it’s a game about making smart decisions with your money 100% of the time.  Investing is the same way.  It’s not about picking stocks... it’s about making smart decisions with your money, 100% of the time.

What matters in investing and in poker is avoiding the “catastrophic loss.”  Always.  You never want to be in a position where you’re down 50%, and you need to double your money just to break even.

The most catastrophic loss I can think of is a Colorado couple I know.  They invested millions of dollars – most everything they had – in risky, pre-IPO dot-com companies in the late 1990s.  Their plan was to leave a million dollars to each of their grandkids.  They had retired, and were traveling the country by motor home.

The problem was, they had no exit plan if things went wrong.  They didn’t even have the ability to get out early and save at least some of their money if necessary.  As it turned out, the worst-case scenario happened.

That motor home is probably parked next to one of their grandkids’ houses right now.

In True Wealth, we rarely take losses that are more than 10%.  If we’re wrong, we move on quickly.  We sell things when the time is right.  To put it in brutal terms, for a trade or investment to be successful, you have to have both a good buy AND a good sell.

For example, I just issued a sell on one of our True Wealth stocks, Rayonier.  Rayonier is a boring timberland company... that was up by 200% since the beginning of 2003.  (We didn’t buy it that early, but we’re still up 66% since entering the investment in 2004... a heck of a nice gain.)

As I put it in this month’s issue: 

“Rayonier is acting more like a Florida land stock instead of a timber stock. And Florida land stocks like St. Joe and Consolidated Tomoka are getting crushed.  We may end up buying Rayonier again someday if it becomes a cheap timber play again. But right now, it’s not that cheap, and the shine may be off Florida land now.”

We had a plan... we entered the trade with our usual thinking... timberland stocks were cheap, unappreciated, and just entering an uptrend.  And we exited with a nice profit, getting out at 15% off Rayonier’s recent closing high.

The quicker you recognize that investing, like poker, is more about money management than your current hand, the quicker you’ll be on the road to making a fortune.

I’d like to thank my family friend for reminding me of this old lesson... and to congratulate him on sticking with the plan he made.

I’m certain he will be successful from here on out.  And if you do the same, you will too...

Good investing,

Steve