A Revised Profit-and-Loss Plan

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A Revised Profit-and-Loss Plan

I found that successful stocks, after breaking out, tend to move up 20% to 25% and then decline, build a new base, and in some cases resume their advance. Therefore, I created a rule that I would buy exactly at the pivot buy point, not pyramid more than 5% past the buy point and would sell each stock when it was up 20% from the breakout point.

The Certain-teed case had been so powerful, however, that it had increased 20% in just two weeks' time. This was the type of big winner I was hoping to find and capitalize on the next time around. Therefore, one important exception was made in the "sell at + 20%
rule." If the stock was so strong that it vaulted 20% in less than eight weeks, the stock had to be held at least eight weeks. Then it would be analyzed to see if the stock should be held for a possible six-month, longterm capital gain (six months was the capital gains period at that time). If stocks declined below their purchase price by 8%, they would be sold and the loss taken.

In summary, here was the revised profit-and-loss plan: Take 20% profits when you have them (except with the most powerful of all stocks) and cut losses at 8%.

The plan had several enormous advantages. You could be wrong twice and right once and still not get into financial trouble. When you were right and wanted to follow up with another buy in the same stock a few points higher, you were frequently forced into a decision to sell one of your weakest-performing holdings. The questionable money continually was force-fed into the best investments.

Also, you were utilizing your money in a far more efficient mariner. You could make two or three 20% plays in a good year, and you did not have to sit through so many prolonged, unproductive corrections in price while a stock built a whole new base for many months.

A 20% gain in three to six months was substantially more productive than a 20% gain that took 12 months to achieve. Two 20% gains in one year equaled a 40% annual rate of return, and if you were using 50% margin, your return would be a whopping 80%.