One of the things that makes me cringe about the financial media is their recommendation of what to do with winners. By winners, I am referring to stocks you own that may be up 25%, 50%, or even 100%, like my Wealthy Joe demo investment.
Jim Cramer, the host of CNBC’s “Mad Money”, suggests you take out your initial investment and let the rest ride because you are now playing with the house’s money.
Other pundits suggest you cut a percentage of your position as the stock moves higher until you have sold all of it.
Still others believe you should implement something called a “trailing stop” that will automatically sell your entire position once the stock falls below a specified price, in order to lock in a profit.
I, on the other hand, disagree with each of these suggestions.
I believe that you should do the complete opposite of selling, and add to your winners.
Some of the greatest investments in history were realized by holding your initial investment and adding to it over a period of years – even decades.
Here are the reasons why you might live to regret using the above three strategies I mentioned:
1. Taking out your initial investment:
Taking out your initial investment may sound safe, once you’ve made 100% of your money. Right? You invest $6000, and now your investment is worth $12,000. So you simply take out your initial investment, and the rest is all profit.
The only problem is that loss is not only measured in real dollars lost. It’s also measured in opportunity cost.
Let me give you an example.
In 2016, I purchased 79 shares of Nvidia (NASDAQ: NVDA) at $69. My total cost was around $6000.
When the stock went to $138, I doubled my money.
Now if I had sold enough at that time to recoup my initial investment of $6000, I would have been left with 49 shares.
If the stock has gone up more, to $300, guess what?
I would have left $11,000 on the table, that’s what!
2. Selling a percentage:
This is an even worse idea.
Imagine owning Amazon back in the day, and selling it once you doubled your money.
If you’d made that same $6000 investment, you’d have left seven figures on the table.
3. Trailing stops:
I have never used a stop loss order in an investment, and I doubt I ever will.
A stop loss order works like this:
Let’s say you bought a stock at $25 ,and then it goes to $50. To lock in your profit, you can place an order to sell your position at a specific price. For the purposes of this discussion, let’s say you entered a stop loss price of $45.
So if the stock trades at $45, you will automatically sell your entire position.
Here’s the problem…
What if the stock goes to $43, then proceeds to go to $100 or even higher? Again, you’ve left a significant amount of dollars on the table.
That’s the problem with using a stop loss.
Bottom line: Stocks are going to be volatile by nature. The best recepe for successful investing is to keep on adding to your winners.
My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.
Click the image of the book at left to be taken to its Amazon page. (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)