** A while back, I struck up a conversation in a doctor's office where the person shared with me that they had lost over $30,000 on a single stock purchase during the last year. Ouch!
** Once, while visiting a stock broker, I observed a prominent sign above his desk reminding him: DON'T FORGET THE EXIT POINT.
** At a more personal level, the single most important (and painful) lesson I've learned in investing is to
AVOID THE BIG LOSSES.
When I teach my investing course to high school students, one of the fundamental concepts that we focus on is that no matter how good you are at picking stocks - some of your ideas are just not going to work out. Your pool of information is always going to be imperfect and incomplete. There will always be emotional factors (greed and fear, for example) that will drive stock prices far above and below what reasonable valuations would indicate. To become a successful investor, I believe it is critical to learn how to keep your losses small when you are wrong about a stock.
EXAMPLES:
52-Week Low Since
High Feb. 20
Apple 202.96 119.15
Google 747.24 413.62
NYSE Euronext 102.38 56.46
Level 3 Communications 6.80 1.80
The first pair of stocks on the list are two of the biggest success stories in the stock market over the past couple of years - and may very well be excellent picks for the future. The last two stock are/were favorites of TV guru Jim Cramer.
The point here is that had you established a position in one of these stocks during 2007-8, your loss could have been as much as 40% to 70%+. And this is not the way you want to treat you savings.
If you are verturing into investing in individual stocks, go in with a plan that keeps your losses small on any single transaction. There are several ways of doing this and in future blogs I'll outline my strategy. But to get things started, let me throw out a couple of rules for your consideration:
1) Always write out your exit point for the down side for any stock you buy. This would be the price you would sell your shares should the stock price go to or below this level.
My exit prices are written on a white board that I can see from my office desk.
2) Never hold a stock that is more than 10% below your buy price.
More on both of these rules - with specific example - next time.
