This Mistake Could Cost You a Fortune

Man, it has been a tough year -- and every time I think things are finally on the right track, something unexpected happens and derails my hopes yet again.

It's not what you think!
You might be assuming I'm talking about riding shares of Goldman Sachs (NYSE:GS) all the way to their all-time low, only to dump them there, and then watch them more than triple in value. Or maybe you think I'm talking about missing out on Freeport McMoRan's (NYSE:FCX) big rebound.

But I'm actually referring to something much more painful for me personally: watching my beloved Oklahoma Sooners drop more games in one season than they have in the past half-decade. Not to mention, lose just about every star they have to injury, including their Heisman-winning quarterback, Sam Bradford.

My grandfather played football for Oklahoma, and I've been a Sooners fan since I was old enough to walk, so I'll always be a Sooners fan -- no matter how bad things get. After all, in sports, sticking by your team through the ups and the downs is a virtue. Just ask any Green Bay Packers fan. (Believe it or not, I'm a Packers fan, too.)

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

Data provided by Yahoo! Finance.

Or ask my fellow Fools Rich Greifner or Adam Wiederman. 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.

I, for one, am sitting on a major loss in Clearwire. If we're being honest, the only reason I bought shares in the first place was because I liked that it was backed by Google, Comcast, and a handful of other tech heavyweights.

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 counsel. 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 when 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 340% since then.

So when do you sell?
IBD's rule probably could have saved you a lot of pain last September.

In the process, though, you might have had to sell every stock in your portfolio (I certainly would have) and you may well have set yourself up to miss out on some truly massive gains as the market rebounded -- like me, with Goldman Sachs.

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.

For what it's worth, David and Tom Gardner rarely sell, and it works for them. Tom's average Stock Advisor pick is performing more than 36 percentage points better than a like amount invested in the S&P 500. Meanwhile, David's are performing 64 points better on average.

Now, 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.

And if you're curious 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 Google and Clearwire. Dolby, Netflix, and Quality Systems are Stock Advisor picks. Google is a Rule Breakers pick. The Fool's disclosure policy is still struggling with the fact that Brett Favre now wears purple -- and beats the Packers while doing so.