The Toughest Day of My Investment Career

In April 2000, I had to sell just about all the stocks I had recommended in my newsletter...

It was the second most difficult issue I've ever had to write.

I felt bad for my readers – they'd seen these recommendations lose 15% to 25% in a month. And I hated telling them to sell. But the reality was, we'd hit our "trailing stops" – our fail-safe to keep us from losing a lot of money – and it was time to get out.

But instead of following my investment advice and selling, readers wanted to buy more of these shares... "Now they're cheap!" they'd tell me.

I shouldn't have felt so bad... It turns out, we did exactly the right thing.

We were closing out some extraordinary winners... For example, we exited our position in JDS Uniphase (JDSU) with a gain of 895%. Of course, we had been up 1,200% just a few weeks before. Then we hit our trailing stop.

JDSU peaked in 2000 and then crashed. By 2002, it had literally given back all of those 1,000% gains. It fell to below where we bought it. The rise was extraordinary... and the fall was even more exceptional. Our policy of "letting our winners ride" drove us to a big profit. And our trailing stop let us keep most of it.

JDSU is an extreme example. But the Nasdaq did lose more than three-quarters of its value from its 2000 peak to the bottom in 2002. Over roughly the same time, the S&P 500 – a broader, less tech-oriented stock index – lost half its value from its peak until its bottom.

In hindsight, as difficult as it was to do back in 2000, boy am I glad I followed my trailing stops. Stocks were obliterated over the next three years, and we avoided all that pain.

I share this story with you today because I recently had to write a similar issue for my newsletter Sjuggerud Confidential. We just closed out a lot of positions. We hit a lot of trailing stops, and we scaled back dramatically.

I wish I could tell you that, since I've gone through this before, it was easier to write a second time around – eight years later. The truth is, it was harder. It was the hardest letter I've ever had to write.

But I'm confident that we did the right thing. The certain way to profit is tolimit the impact of your bad decisions and maximize your good ones. I know this. It's just difficult to do when it comes to it.

We sold out most of our positions in April 2000, and in hindsight it was a spectacularly good decision. We locked in extraordinary profits and eliminated the possibility of further losses. Now we're doing a similar thing, cutting the stocks that have hit their trailing stops or have been underperforming.

This time around – just like in 2000 – subscribers really don't want to take my advice and sell. But if the result is half as good as it was in 2000, I'll be happy...

My experience tells me trailing stops work. Use them.We sold at the right time in 2000. Here in 2008, we're using the same methods as we did in 2000. Hopefully, the result will be similar. Hopefully, in hindsight, we'll be able to say that following our trailing stops – no matter how painful it was at the time – was the right thing to do.

Good investing,

Steve

P.S. If you're not familiar with how trailing stops work, watch "Ten Steps to Getting Started With TradeStops." TradeStops can help you track your trailing stops online and send you alerts if they're hit... Another program, XLQ, helps you keep track of your stocks through Microsoft Excel.

We at DailyWealth helped both these services create products that track trailing stops. But we receive no compensation from them... We're just thankful they invested their own time to make these products available.

Both have been around a few years now. Both have free trials. Give them a try and figure out which one is right for you.