This Mistake Could Cost You a Fortune

Frankly, I thought it was impossible -- that there was no way this could ever happen. But then 2008-2009 hit and proved me completely wrong.

It's not what you think!
You might be assuming I'm talking about AIG (NYSE:AIG) single-handedly destroying billions in shareholder wealth, Fannie Mae (NYSE:FNM) collapsing overnight, or even my typically steady Coca-Cola (NYSE:KO) shares taking a sharp dive. But I'm actually referring to something much more painful for me personally: college football.

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 Oklahoma lose its fifth straight BCS bowl game -- and its third straight national championship game -- to Ol' Tim Tebow and team this January.

Of course, I'll always be a Sooners 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 is a different ball game
For proof, just ask any longtime "fan" of:

Data provided by Yahoo! Finance.

Or ask my fellow Fool Rich Greifner. Or even ask Jim Cramer. In his book Real Money, Cramer 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. Take Crocs investors as an example.

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. I actually found three examples where breaking IBD's rule actually paid off big-time:

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 241% since then.

So when do you sell?
In today's 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 saw many excellent businesses losing 5% or even 10% per day late last year.

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.

I challenge you to use the comment box below this story to tell us what your strategy is, and how it held up through the 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 more than 42 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.

Already subscribed to Stock Advisor? Log in at the top of this page.

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

Austin Edwards owns shares of Coca-Cola -- which is both a Motley Fool Inside Value and an Income Investor recommendation. Home Depot is also an Inside Value pick. Dolby, Netflix, and Quality Systems are Stock Advisor recommendations. Both The Motley Fool's disclosure policy and Sam Bradford will be around for at least another year. Unfortunately, so will Tim Tebow.