This Mistake Could Cost You a Fortune

Man, did I ever blow it ... I thought I'd found a sure thing, a no-brainer, a slam dunk. So I guaranteed a big win.

It's not what you think!
You might be assuming that I had suggested you load up on Ford (NYSE: F  ) , Fannie Mae (NYSE: FNM  ) , or Las Vegas Sands (NYSE: LVS  ) this time last year.

But in reality, I made a far more humiliating call.

You see, last December my beloved Oklahoma Sooners knocked off the then-No. 1 ranked Missouri Tigers in the Big 12 Championship game. So I threw up an article that guaranteed the Sooners would go on to handle West Virginia in the Tostitos Fiesta Bowl.

But then disaster struck
I'm not sure which was worse -- watching West Virginia clobber my team 48-28, or reading the dozens of emails from readers telling me that the Mountaineers had, in fact, clobbered my team 48-28 -- you know, just in case I had missed it.

My grandfather played football for Oklahoma, and I'm a lifelong Sooners fan. So I'll keep rooting for them, even though they've lost their last four BCS bowl games and caused me a lot of heartache in the process.

After all, in sports, sticking by your team through the ups and the downs is a virtue. Just ask any Boston Red Sox fan. Wall Street, though, is a different ball game.

For proof ...
Just ask any "fan" of:

Stock

One-Year Return

DryShips (Nasdaq: DRYS  )

(85%)

Nortel Networks (NYSE: NT  )

(99%)

Sprint Nextel (NYSE: S  )

(86%)

Or ask my fellow Fool Rich Greifner.

Or even ask Jim Cramer. In his book Real Money, he reminds investors, "This is not a sporting event; this is money. We have no room for rooting or hoping."

Yet it happens all the time. Investing message boards are full of desperate investors who hope some cash-rich behemoth like Microsoft (Nasdaq: MSFT  ) will come along and buy out their tiny niche tech play for a huge premium.

Others ride stocks all the way into the ground because they're emotionally attached to the company's story, products, or management. Crocs shareholders have seen their investments drop 94% this year. Ouch!

Ditch that loser!
One of the "20 Rules for Investment Success" from Investor's Business Daily is to "cut every loss when it's 8% below your cost. Make no exceptions so you'll avoid any possible huge, damaging losses."

To a sports fan, that advice might seem cruel and unusual, but it's actually good investment advice.

Or is it?

To find out, I dug through David and Tom Gardner's Motley Fool Stock Advisor picks because they often rerecommend a stock even after a big run-up -- or a sharp fall.

In no time, I found three examples of when breaking IBD's rule actually paid off:

Stock Advisor Pick

Decline After Recommendation

Gain After Re-Recommendation

Netflix

23%

113%

Dolby Labs

10%

61%

Quality Systems

14%

755%

These weren't flukes, either
In Tom Gardner's re-recommendation write-up for Dolby, he noted, "The stock has fallen 10%. Am I concerned? No. Am I thinking of dumping the shares? Hardly. I liked this stock then, and I like it even more today when it's a few bucks cheaper on no sustainable bad news."

Not only did he see no good reasons to sell the stock, he also saw plenty of good reasons to own it. He noted "the company's strong brand, excellent financials, and long history of providing innovative audio entertainment technologies."

Result? A nice gain
Similarly, David Gardner admitted, in his re-recommendation write-up for Netflix, "We're currently sitting on a 23% loss." But he went on to say, "I think this is one cheap stock at $11, backed by a great management team that's going to create value for us going forward."

Note that he, too, had well-thought-out reasons for owning the stock: "It remains first and best in a growing industry, creates convenience for millions of consumers, and is led by visionary management that markets aggressively." Netflix stock has risen 113% since then.

So when do you sell?
In today's dismal market climate, IBD's rule probably looks like pure genius -- and it probably could have saved you a lot of pain.

In the process, though, you might have had to sell every stock in your portfolio, and you may well have set yourself up to miss out on some truly massive gains when the market finally rebounds.

The point is, when it comes to knowing when to sell, investors have drastically different strategies. Many have hard-and-fast numerical rules -- which is at least part of the reason we've seen the market dropping 5% or even 10% per day recently.

Others -- like the Gardner brothers -- stick to a more analytical and intellectual approach to determine when to recommend their Stock Advisor subscribers sell a stock. So, when do David and Tom Gardner consider dumping a stock? Primarily when they encounter:

  • Untrustworthy management.
  • Deteriorating financials.
  • Mergers, acquisitions, and spin-offs that could damage the business.

The debate rages on
Someone once said, "I have no problem knowing when to buy a stock, but if I just knew when to sell, I'd be a great investor."

Investors may never agree on when or why to sell a stock. That's why it's important to have an emotionless, well-thought-out strategy in place. If you don't, you may suffer major losses or miss out on massive gains.

For what it's worth, David and Tom Gardner rarely sell, and it works for them. Even in this brutal bear market, their average Stock Advisor pick is performing 29 percentage points better than a like amount invested in the S&P 500.

If you'd like to see what David and Tom are recommending now -- including their top two picks for new money -- you can join them at Stock Advisor absolutely free for 30 days.

In addition to all of the stock picks and research, you'll also get full access to exclusive members-only discussion boards, where you can swap thoughts about when to buy or sell a stock with thousands of other dedicated investors.

To learn more about this free, no-obligation 30-day trial, simply click here.

This article was first published Dec. 28, 2007. It has been updated.

Austin Edwards is looking forward to Jan. 8 -- but doesn't own shares of any companies mentioned in this article. Dolby, Netflix, and Quality Systems are Stock Advisor recommendations. Microsoft and Sprint are Inside Value picks. The Motley Fool's disclosure policy couldn't be happier about being a three-point underdog with a Heisman Trophy-winning quarterback. Boomer Sooner!


Read/Post Comments (0) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 800173, ~/Articles/ArticleHandler.aspx, 9/16/2014 4:05:06 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement