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 Freeport-McMoRan (NYSE:FCX) or Transocean (NYSE:RIG) before commodities began selling off, the bottom dropped out of the oil market, hedge funds began unloading them as fast as they could, and panic officially set in.

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 Tampa Bay Rays fan. Wall Street, though, is a different ball game.

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

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 Google (NASDAQ:GOOG) 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 95% 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 rerecommend 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.

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 34% since then.

So when do you sell?
Some people 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 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. Even in this brutal bear market, their average Stock Advisor pick is up 1%. Meanwhile, you'd be down more than 26% 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 claw its way back into the national championship picture after its heart-breaking loss to Texas. 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 owns shares of Google, Freeport-McMoRan, and Transocean. Dolby, Netflix, and Quality Systems are Stock Advisor recommendations. Crocs is a Motley Fool Hidden Gems Pay Dirt selection. Google is a Rule Breakers pick. Chesapeake Energy is an Inside Value pick. Thankfully, The Motley Fool's disclosure policy is not a Longhorns fan.