strategy

Investor's Business Daily
Smart Investors Hold Winners Long And Cut Losers Short
Wednesday April 21, 10:41 am ET
By Jonah Keri


The market starts acting jittery, and you get nervous. With one winner and one loser in your portfolio, you follow what you feel is the safe path - sell your winner, keep your loser.
It's a natural reaction: Take money off the table, you figure, then try to recoup your losses. It's also exactly the wrong approach. Holding on to your losers and selling your winners fast increases your investing risk and short-circuits potential gains.

To enhance your chance at success, take the exact opposite tack: Hold your winners, sell your losers.

In following that approach, you're taking advantage of multiple trends. For one, stocks that go up tend to keep going up, while stocks on the way down tend to keep falling.

Holding your losers also pits you against the cardinal rule of investing: Sell immediately if your stock falls 7% to 8% from your buy point.

If you sell a stock at a 7% loss, you need only make an 8% gain to get back to even. If you let your loss escalate, though, your odds of rebounding get slimmer. A 20% loss requires a 25% gain to get back to even. Take a 33% loss and you'll need a 50% gain to return to square one. Lose 50% and you'll need to find a stock that doubles to turn the trick.

How many times since the start of the '03 rally have you doubled your money on a stock? Likely not many.

Shuffle Master has been an exception, though, thus showing the danger on the flip side - selling early can cost you big gains. The maker of automatic card-shuffling machines formed a 6 1/2-month base starting in November 2002.

The stock formed a bullish, downward-sloping one-week handle (point 1), finding support above its 50-day moving average. Then it broke out in brisk trade (point 2) in May.