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Whatever stocks you pick to hold, you will have a few stocks with severe losses, a lot of stocks with decent, but not great, returns and a few stocks with wonderful returns. To state the obvious, on the day of purchase all of the stocks bought look very attractive. It is only after a few years of ownership, an investor begins to realize that company T will prove to be a wonderful holding and that company A was a terrible choice.The results shown in companies A through T suggest several critical courses of action to invest successfully. First, unlike the fictional character in paragraph one who bought Internet Cyberlinks, a successful investor must take losses as quickly as possible. You cannot afford to let the value of a holding drop 50% or more below original cost if it can be avoided. When it is clear that A will not work out, it is fatal to wait for the stock price to "come back". That is a sure method to turn a small loss into a large one. Money in losing positions must be reinvested in a perpetual hunt for companies like Company S and Company T. Some times several losing stocks are purchased before a decent winner is discovered but one big winner can more than make up for many losers.
Second, unlike the person in paragraph one who bought National Rabbitsfoot, it is essential that winning positions be held as long as (1) company earnings continue to meet growth expectations and (2) as long as the shares do not become too richly priced in relation to the estimated reasonable value per share. Holding Company T for the entire period is absolutely essential in this example, to success. Therefore, an investor cannot sell a winning position just because it has doubled or tripled. That is true even though, occasionally, a stock, thought to be a winner, may drop back to the original price or even below.
Third, an investor must not over pay when purchasing stock. The pattern of gains and losses outlined in the table above will not change but the individual gain and loss values would change. Paying higher prices for stock purchases has the effect of moving up the break-even point for that purchase. Any gains realized will be smaller and any losses realized will be bigger than would be the case if a lower price had been paid.
The un-tutored investor tends to overpay for stocks, buying when the outlook for the company in question is rosy, to be slow to take losses and quick to take gains following the hoary maxim that, you never go broke taking a profit.
The key to investment success is: to buy when share prices are at bargain levels, to take losses quickly when it becomes clear a purchase will not be a winner and to hold profitable positions as long as possible.
About the Author
Marshall Delano is an experienced money manager. After working for serveral years as a stock broker, he managed private hedge funds investing in the U.S. stock markets for seventeen years. As a hedge fund manager, Mr. Delano shared in profits made from investing in the stock market. Since 1993, he has managed clients on a fee basis as a Registered Advisory Representative.
Mr. Delano has served as the Managing Partner of partnerships organized to invest in the stock market. He has also served as President of Registered Investing Advisory firms and is currently President of the Advisory firm, S.G. LONG & Company. His education includes a Bachelor's Degree in Economics and a Masters Degree in Business Administration.
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