It’s easy to lose money in the stock market. Every investor has their own way of doing it, but some have mastered a special technique. It’s using the strategy of loading up a portfolio with the worst performing stocks.
Not every big loser starts out that way. Many stocks are great but eventually their time runs out and selling becomes the norm. The stock market can be great for profiting from big winners but there’s a trap that some investors fall into with these stocks.
So what’s the trap?
Consider the following about the stock market. Realistically, most publicly traded companies are successful companies. It’s hard to generate hundreds of millions, or billions, of dollars in sales and earnings if the underlying business is a mess. It’s why we invest in the stock market. Big investors know this, but a change in appetite for a stock or the market generally, shapes a down trend that has ruined many investor portfolios and psyches.
The problem starts when an investor rationalizes the great company they invested in should be held during down trends. Unfortunately, the problem will be applied to most stock purchases, adding another loser to the portfolio one after another. Eventually, the portfolio is swamped by big losses in nearly every holding.
Corrections and bear markets are the death of a portfolio if capital is exposed to down trends. Since most stocks follow the trend, the emphasis needs to be on mastering the market, not judging corporations.
150 years of evidence tells us the following about stocks
Stocks that fall by 40% or more are no longer in favor with big investors. Those stocks may bottom out and recover, but they are inferior choices as other stocks undergo heavier buying on a relative basis.
- Most of the market’s greatest winners become average stocks, at best, following a break in their long term up trend.
- New sectors and stocks become the big winners in new bull markets. It’s not uncommon for a complete change in leadership from one rally to the next within the same bull market.
There are two strategies we suggest to investors that supports successful management of a growth portfolio.
1. Sell any purchase that is below the purchase price, before the loss gets large.
2. Sell any stock or E.T.F. that has triggered a sell signal. In layman’s terms, sell anything that is no longer going higher when the evidence is sufficient to render this conclusion. It works and it works well.
Knowing what constitutes a sell signal is paramount to good timing in the stock market. Executing sells of stocks and E.T.F.'s, without subjective interference, is the hallmark of a successful investor.
Unbiased independent market analysis with strategies and execution tips for investors who want to know what works in good and bad markets.