It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.
– George Soros
On October 14, 2009, In Thought of the Day, by ElfLord
On October 14, 2009, In Good Articles, by ElfLord
IF YOU THINK knowing when to get into a stock is tough, try deciding when to get out. While we ideally want to stay with a position for as long as possible, there’s no federal law that says you must hold Intel (INTC) until your dying day. A trader is just like a trapeze artist, who, while swinging high above the circus crowd, must master not only grabbing onto the next bar, but letting go of the one that came before it.
When it comes time to prune your portfolio, the first stocks you should consider selling are your losers. There are the obvious tax advantages of doing so. But even more important is the likelihood that losing stocks will stay losing stocks. Very seldom does one of my holdings come back from the grave.
But what about selling your winners? You might have some. Although the major averages are under water year-to-date, there are actually plenty of stocks that are doing quite well.
So if you are fortunate enough to be sitting on some winners these days, how do you know when it’s time to take the money and run, as Steve Miller puts it? What is the smartest way to turn a paper profit into the real thing? (more…)
On October 13, 2009, In Thought of the Day, by ElfLord
The Alligator Principle is based on the way an alligator eats: the more the victim tries to struggle, the more the alligator gets. Imagine an alligator has you by the leg; it clamps your leg in its mouth and waits while you struggle. If you put one of your arms in the vicinity of its mouth while fighting to get your leg free, it lunges and then has your arm and leg in its clutches. The more you struggle, the more the alligator takes you in.
So if an alligator ever gets you by the leg, remember that your only chance is to sacrifice the leg and drag yourself away. Translated to market terms, the principle is when you know you are wrong, close your position! Don’t rationalize, hope, pray, or anything else, just get out. Don’t change your position, hedge it, or anything else; just take the loss and get out!
– Victor Sperandeo