This Mistake Could Cost You a Fortune

Just when I thought it couldn't get any worse ... 2009 hit and proved me wrong yet again. And frankly, I just don't know how much longer I can take it.

It's not what you think!
You might be assuming that I'm talking about the fact that even though we've seen one of the biggest rallies in years, my positions in Freeport-McMoRan (NYSE: FCX  ) and Transocean (NYSE: RIG  ) are still well underwater -- but I'm actually talking about something much more painful for me personally ...

You see, my grandfather played football for Oklahoma, and I've been a Sooners fan since I was old enough to walk. So, it was nothing short of devastating to watch them lose their fifth straight BCS bowl game -- and their third straight national championship game -- to Saint Tim and team this January.

Of course, I'll always be a Sooner fan -- even though they're now the Buffalo Bills of college football. After all, in sports, sticking by your team through the ups and the downs is a virtue. Just ask any Green Bay Packers fan.

Wall Street, though, is a different ball game
For proof, just ask any "fan" of:

Stock

1-Year Return

Freddie Mac (NYSE: FRE  )

(97%)

Developers Diversified Reality (NYSE: DDR  )

(93%)

American Capital (Nasdaq: ACAS  )

(94%)

Fifth Third Bancorp (Nasdaq: FITB  )

(90%)

Data provided by Morningstar.

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 will come along and save their decades-old American superbrand. But as Circuit City investors found out, this is often a losing bet -- especially in this credit-strapped market.

Others ride stocks all the way into the ground because they're emotionally attached to the company's story, products, or management -- and meet with similarly dismal results.

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 re-recommend a stock even after a big run-up -- or a sharp fall. I actually found three examples where breaking IBD's rule actually paid off big time:

Stock Advisor Pick

Decline After Recommendation

Gain After Re-Recommendation

Netflix

23%

224%

Quality Systems

14%

829%

Dolby (NYSE: DLB  )

10%

76%

These weren't flukes, either
In his re-recommendation write-up for Netflix, David Gardner admitted, "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 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 224% 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 as the market rebounds.

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 many excellent businesses losing 5% or even 10% per day since October.

Others -- like the Gardners -- stick to a more analytical and intellectual approach to determine when to recommend that 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 spinoffs 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.

That's why I challenge you to use the comment function below to tell us what your strategy is and how it's held up through this brutal bear market.

For what it's worth, David and Tom Gardner rarely sell, and it works for them. Even in this wrenching market, their average Stock Advisor pick is performing 34 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 owns shares of Freeport-McMoRan and Transocean. Dolby, Netflix, and Quality Systems are Motley Fool Stock Advisor recommendations. Both The Motley Fool's disclosure policy and Sam Bradford will be around for at least another year.


Read/Post Comments (3) | Recommend This Article (27)

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.

  • Report this Comment On March 26, 2009, at 8:47 PM, MotleyGulibles wrote:

    As In CSE, CX, AIB, and all those picks recommended by the Fools Million Dollar portfolio, all run into the ground by the Motley Fool hypers ... AIB from 40$ to 0.75c. the fools cream of the crop MDP pick.. haha!

    you foolish fools have triple + standards!!

  • Report this Comment On March 27, 2009, at 12:38 AM, FMIC2 wrote:

    Minister Martin Kabwelulu recently accepted a payoff of 1.8 million in USD from CEO Richard Adkerson of Freeport McMoran Copper and Gold. This is a horrible travesty for the poor people of the Democratic Republic of Congo. Anyone familiar with Freeport McMoran Copper and Gold's global misconduct, is aware of how Freeport McMoran Copper and Gold provides bribes to homicidal dictators and military officials. FMI's illegal activities in the DRC and Indonesia have caused the deaths of millions of woman and children. Freeport McMoran Copper and Gold's blatant toxic waste dumping and other environmental atrocities, will leave the DRC and Indonesia as uninhabitable toxic waste dumps. This is a sad day for the poor people of the DRC. Hopefully, someone will intervene and kick Freeport McMoran Copper and Gold out of the DRC before it is too late for millions of the DRC residents. As of this date, Freeport McMoran Copper and Gold is responsible for over 5 million deaths in the DRC; mostly infants, children and woman.

    Think about this when you think about buying FCX stock. When Freeport McMoran Copper and Gold get kicked out of the DRC and Indonesia, anyone owning their stock is going to have to use the paper to wipe their posteriors. Buying FCX stock is like investing any the Devil. One day God is going to raise his hand and the Devil will be getting his due. One day, sooner than later, the people of the DRC and Indonesia are going to have enough of Freeport McMoran's garbage and on that day, they will have their due.

    Article coppied by permisson of Fmicomplaints.com

  • Report this Comment On September 01, 2009, at 7:27 AM, ejhejh wrote:

    It's great to be a Florida Gator.

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