The basics are what turn:
A baby into a toddler
A young man or woman into an adult
Minor leaguers into major leaguers
Amateurs into professionals in every walk of life
Babies see everyone around them walking and talking. They want to be just like the rest, so they try and try until they learn how to walk and talk Young men & women are taught that its the right thing to do to keep their hair neat, wear clean clothes, dont swear (at least in public) and write thank you notes when they are given gifts. Its these basics like that help them mature into adults. Athletes know they must work out every single day refining the basics, before they can truly become a professional.
So why do we turn away from basics when it comes to our investment portfolio?
We watch a stock go up week after week and only THEN do we decide we gotta have that! Or, I lost money the last few months, so Im going to sit this out for a while.
Or, we watch a stock in our account drop and drop and drop and think to ourselves, itll come back…someday or the market will bail us out of this one or the worst of all well, Im a long term investor. Yeah, right!
So, here are two basic steps to help you:
1. Write It Down!
We usually write down why we initially purchased a stock. We like to ask new clients why they bought a particular stock. Many simply cannot tell us why. Whether the reason is fundamental, technical or simply a “special situation,” its important to keep that reason in front of you while you are in a stock. If that reason changes, then you are better off, in almost all cases to sell the stock and move into another investment.
So write it down. Just jot down the reason you decided to buy that stock. Do it! Because when it comes time to decide whether to hang in there or sell, youll have the reason you bought right in front of you. If the story has changed, then it may be time to sell. Like sending thank you notes and saying please, its a basic thing, yet very few do it today!
Why dont you write down your reasons? We can think of a few:
Many of us today are usually in a hurry
Many get tips from a friend (who doesnt give you a reason why to buy, except they said it was the greatest thing since sliced bread?)
Their broker or advisor told them to do it, and theyve done pretty well (except for that belly lint.com stock a few years back)
So you dont ask for the reason. YOU NEED TO FIND OUT THAT REASON!
So write down why you bought a stock. This will give you a better chance of not losing money. Write It Down!
2. Sell On The Way Up!
Doesnt it just absolutely kill you to see the stock you bought at $50 go up to $72 (a 44% gain), and you didnt sell? And today it is $41…and you are wondering what to do? (Gee, only 8 more points and Im even! By the way, 8 points in this example means 16%, which can be a long lonely way to go.)
When we buy a stock, often we will set stop orders…at the time we buy…to sell a portion of the stock when it is 25% higher. For example, when we buy 300 shares a stock, we will place an order to sell 100 shares, or 1/3rd of the position, when the stock gets 25% above what we paid for it. And then we will likely discuss placing another order to sell some more shares when we are 50% above the original purchase price. You have to have a game plan in place…or prepare to be swung around by the market.
Likewise, we also have our system alert us when we are down 10% in a stock. At that point, we discuss the original REASONS WHY WE BOUGHT THE STOCK. If the situation has changed, we need our exit strategy. If the story is intact, we still consider what our actions will be if the stock continues to drop and what to do.
Funny how we never seem to get away from basics. Remember your momma telling you to stand up straight, eat your vegetables, wash your hands, and say please and thank you? Keep in mind that basics can make or break your portfolio!