c15 JWBT016-Busby October 9, 2008 9:21 Printer: TBD
Stocks and ETFs 149The biggest problem that many traders have when trading stocks is
that they buy, hold, and forget. Never do that. There are too many variables
in the market that can cause your stocks to fall in price. If you are not
watching the price action, before you know it you have lost 20 percent,
40 percent, or more of your value. Even though the market may again rise
to pre-sell-off prices, it may take months or years. Instead of riding the
investment down, you could have liquidated the particular investment and
moved those funds into another area, where the value could have been
preserved or grown.PEARL 20
Like your stock choices, but do not marry them. When they stop paying, it is
time to split.Another good thing to remember is that stocks are generally selected
because you like the company or the product. Like your choices, but do
not marry them. Stay with the stock as long as it pays, but when the
fun is over, move on. At the altar it may be “until death do us part,” but
on Wall Street it is just “until the money stops coming into the bank.”
If the stock is not paying you, get rid of it. Any time that a stock drops
10 percent, I begin considering my exit strategy. If the overall market goes
up by 2 percent in a session while your stock moves down in price—
get out.PEARL 21
If the general market is moving up and your stock is not, you have a problem.
Specifically, if the overall market moves up by 2 percent and your stock is mov-
ing down—get out!It may seem contrary to logic, but often the stocks that have been
the most bullish in an up-market will fall the fastest in a downturn. That
is one of the reasons that it is hard for investors and traders to liq-
uidate positions. After all, these have been the shares that have been
strongly moving up and adding valuation to the portfolio. It is hard to let
them go.PEARL 22Stocks that have been the most bullish typically fall the fastest in a downtrending
market.