Rule #1 - Cut Your Stock Losses Early

Just a short post to explain the loss rule I follow for selling my stocks. 

After experiencing the whipsawing we saw yesterday, this post I think is important. If I owned pot stocks or junior gold/silver stocks then I would have had to sell them yesterday. Why? Most dropped precipitously and with NO warning. This is another reason to just stand aside and get the hell out of the way. Losses of 10-15% per stock was the norm on Tuesday and Wednesday.

You have to have rules when you are playing the game of buying and selling stocks. It doesn't matter if you believe it's a game or not. IT IS! and like all games you need to follow some rules to get it right or at least have the rules work in your favour. To win you have to have a strategy of increasing the odds so they work for you long term and not against you. 

When To Sell

This is an emotional decision. Nobody likes to admit they got it wrong. The stock you picked to make money on is a loser. This is from William J. O'Neil and I follow - "You have to get rid of it as soon as you lose no more than 8%. Maybe sooner but definitely no more than 8%. That's the absolute maximum you are allowed to lose."

What's The Math Say?

:adapted from Investor's Business Daily

If you sold a $50 stock after losing 8% you now have $46 left. You only need to buy something else and have that stock gain 8.7% to get your original capital back.

However, let's say you're stubborn and have an inflated ego and you hang on to the stock because you can't believe you picked a loser.

You let the stock drop 25% which is what a lot of investor's do all the time. It's now trading at $37.50. You need to make a gain of 33% on your next purchase to get all your money back. That's a lot harder to do than making that piddly 8.7% you would have, had you got out early.

Let's say you are even more stubborn and still hang in and you're now down 50%. Your stock is now trading at $25 from $50. It has to double from here for you to get your money back.

You have to ask yourself, how many stocks did I pick last year year that have doubled in price? Very tough to do consistently.

You want to be able to live to invest another day. That's why you cut your losses early and stay out of trouble. Take your loss and look for the next winner by selling when you lose 7-8%.

You can do this and make simple and easy 25-30% gains and still be wrong 3/4 times. Preserve your capital and live to invest another day.

Never forget Rule #1

My Recent Trading History

This is how getting out early can save you from further losses. This is how much in percentage terms I would have further lost had I not sold these stocks when I did.

Osisko Mining (18.18%)

Novo Resources  (7%)

Painted Pony (5%) after a small gain

Acuity Ads (13%)

Advantage Oil and Gas (13.3%)

This has just been in the last 2 weeks. I have learned to get out early to save money. I just try and hit singles. Take your loss and start looking for your next winner. Most of the time it will happen after a general market decline when stocks are down 20%. Looking back, the rule really worked and saved me from some gut wrenching rides down to the bottom.

Current Positions

I am only holding 2 trading positions right now and they are CGX (0.78) and OTEX (0.18).

We are a long way from having to sell these 2 stocks and I'm hoping to be in the green real soon.

I NEVER USE MY RETIREMENT MONEY TO TRADE IN AND OUT OF 

STOCKS!

You can look at our retirement holdings here.

Investing and Saving Ideas You Can Use NOW!

If you are looking at ways to save money this new book The Cashflow Cookbook can help you find some savings to then use to invest.

If you are having trouble getting your financial house in order and organized then you need to read Worry Free Money. 

If you are further looking for portfolio ideas then you might find my review of The 6-Pack Portfolio a way for you to get started on your investing journey. All of our retirement money is invested in this manner. We just hold more than 6 positions.

All 3 of these books written for Canadians by Canadians.