Always Sell Your Worst Stock First

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Always Sell Your Worst Stock First

If you own a portfolio of equities, you must learn to sell your worst-performing stocks first and keep your best-acting investments a little longer. In other words, sell your cats and dogs, your losers and mistakes, and try to turn your better selections into your big winners.

General market corrections, or price declines, can help you recognize new leaders if you know what to look for. The more desirable growth stocks normally correct l'/2 to 2/2 times the general market averages. However as a rule, growth stocks declining the least (percentagewise) in a bull market correction are your strongest and best investments, and stocks that plummet the most are your weakest choices.

For example, if the overall market suffers a 10% intermediate term falloff, three successful growth securities could drop 15%, 20%, and 30%. The ones down only 15% or 20% are likely to be your best investments after they recover. Of course, a stock sliding 35% to 40% in a general market decline of 10% could be flashing you a warning signal, and you should, in many cases, steer clear of such an uncertain actor.

June 1972, a normally capable, leading institutional investor in Maryland bought Levitz Furniture after its first abnormal price break in one week from $60 to around $40. The stock rallied for a few weeks, rolled over, and broke to $18.

Several institutional investors bought Memorex in October 1978, when it had its first unusual price break. It later plunged. Certain money managers in New York bought Dome Petroleum in September 1981 after its sharp drop from $16 to $12, because it seemed cheap arid there was a favorable story going around Wall Street on the stock. Months later Dome sold for $1, and the street talk was that the company might be in financial difficulties.

None of these professionals had recognized the difference between the normal price declines and the highly abnormal corrections that were a sign of potential disaster in this stock. Of course, the real problem was that these expert investors all relied solely on fundamental analysis (and stories) and their personal opinion of value (lower P/E ratios), with a complete disregard for what market action could have told them was really going on. Those who ignore what the marketplace is saying usually suffer some heavy losses.

Once a general market decline is definitely over, the first stocks that bounce back to new price highs are almost always your authentic leaders. This process continues to occur week by week for about three months or so, with many stocks recovering and making new highs. To be a truly astute professional or individual investor you must learn to recognize the difference between normal price action and abnormal activity.
When you understand how to do this well, people will say you have "a good feel for the market."