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 suggested you load up on AIG (NYSE: AIG  ) or Ambac Financial (NYSE: ABK  ) back when their shares were still in the double digits.

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 missed it.

Now, 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 Red Sox fan. Wall Street, though, is a different ball game.

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

Stock

One-Year Return

Legg Mason (NYSE: LM  )

(43%)

Washington Mutual (NYSE: WM  )

(88%)

National City (NYSE: NCC  )

(60%)

Or ask fellow Fool Rich Greifner.

Or 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 ExxonMobil (NYSE: XOM  ) will come along and buy out their tiny niche energy 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 (Nasdaq: CROX  ) shareholders have seen their investments drop 81% 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. They often re-recommend a stock even after a big run-up -- or a sharp fall.

In no time, I found three examples of when breaking this rule paid off big time.

Stock Advisor Pick

Decline After Recommendation

Gain After Re-recommendation

Netflix

23%

147%

Dolby Labs

10%

70%

Quality Systems

14%

798%

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 154% since then.

So when do you sell?
Some people have hard-and-fast numerical rules. Others -- like the Gardner brothers -- stick to a more analytical and intellectual approach. It's a good thing, too, or else their Stock Advisor subscribers would have missed out on some massive gains.

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."

While investors may never agree on when or why to sell a stock, 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. Their average Stock Advisor pick is up 42%. Meanwhile, you'd be up only 3% if you'd bought the S&P 500 instead.

If your stocks aren't doing as well, they could be -- especially because you can join David and Tom at Stock Advisor for 30 days absolutely free. You'll get full access to their picks and stock research, and you'll even get insights on when to sell a stock ... and when to hold onto it.

About the only thing they won't be able to tell you is whether Oklahoma will be able to take down TCU this weekend and take over the coveted No. 1 spot (tough luck, USC). But hey, we already know the answer to that one ... I hope.

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 doesn't own shares of any of the companies mentioned. Dolby, Netflix, and Quality Systems are Motley Fool Stock Advisor recommendations. CROCS is a Motley Fool Hidden Gems Pay Dirt selection. Legg Mason is a Motley Fool Inside Value pick. The Fool owns shares of Legg Mason and has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (1)

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 September 27, 2008, at 11:48 AM, mustangsally14 wrote:

    BOOMER......

  • Report this Comment On September 27, 2008, at 8:10 PM, medtech00 wrote:

    SOONER!!

  • Report this Comment On September 29, 2008, at 11:00 AM, SteveTheInvestor wrote:

    Yeah. And...following the SA recommendations, I have....

    Doubletake down 35%

    Netgear down 35%

    Vasco down 45%

    So, I guess if these stocks make absolutely stellar comebacks, I might break even in the next few years. Yeah baby! Stellar, just stellar.

  • Report this Comment On September 30, 2008, at 11:39 AM, javaman2007 wrote:

    Ok. Can you give us David and Tom Gardner's 3 worst picks after re-recommendation? I am sure you can find in no time. Stop misleading people. The best way to show good recommendation is to see what percent of all calls have been good. if it is better than 50%, it is worth listening. Otherwise you can as well talk to a 5yr old about recommendations.

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