"I'm A Long-Term Investor; I'm Not Worried; I'm Still Getting My Dividends"

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"I'm A Long-Term Investor; I'm Not Worried; I'm Still Getting My Dividends"

Another risky statement is to say to yourself, "I'm not worried about my stocks being down because they are good stocks, and I'm still getting my dividends." This is naive because good stocks can go down as much as opinion that they are good stocks.

Furthermore, if your stocks are down 25% in value, isn't it rather absurd to say you're all right because you are getting a 4% yield? A 25% loss plus a 4% income gain makes a big fat 21% net loss.

If you aspire to be a successful investor, you must face facts—most of the reactions you have about taking losses are rationalizations, because no one wants to take losses. You have to do many things you don't want to do to increase your chances of success in the stock market. You must develop exact rules and tough-minded selling disciplines.

All Common Stocks Arc Speculative

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All Common Stocks Arc Speculative

There is considerable speculation in all common stocks, regardless of their name, quality, or purported blue chip status. Every 50% loss began as a 10% or 20% loss. Having the raw courage to sell and cheerfully take your loss is the only way you can protect yourself against the possibility of greater losses. Decision and action should
be instantaneous and simultaneous. To be a winner, you have to learn to make decisions.

If a stock gets away from you and the loss becomes larger than 10% or 15%, which can occasionally happen to anyone, the stock normally should be sold anyway.

In fact, in my experience the ones that get away from you for larger than normal losses are usually the really awful selections that must be sold. It is wise to remind yourself, "If I let a stock drop 50%, I must make a 100% gain on the next stock just to get even, and how often do I  buy stocks that double?"

It is a dangerous fallacy to assume that because a stock goes down, it has to come back up. Many don't, and some take years to recover. American Telephone and Telegraph hit a high of $75 in 1964 and took 20 years to come back.

Take Your Losses Quickly and Your Profits Slowly

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Take Your Losses Quickly and Your Profits Slowly

There is an old investment saying that the first loss in the market is the smallest loss. In my view, the way to make investment decisions is to take your losses quickly and your profits slowly. Yet most investors get emo-Even after all this explanation, most investors will still ask, "Shouldn't we sit with stocks rather than selling and taking a loss? How about unusual situations where some bad news suddenly hits and causes price declines? Does this loss-cutting procedure apply all the time, or are there exceptions— like a company has a good, new product?" It doesn't change the situation one bit. You must protect your hard-earned pool of capital.

Letting your losses run is the most serious mistake made by almost all investors! You positively must accept that mistakes in either timing or selection of stocks are going to be made by even the most professional investors. In fact, I would go so far as to say if you aren't willing to cut short and take your losses, then you probably should not buy stocks. Would you drive your car down the street without brakes?

Cutting Losses Is like Buying an Insurance Policy

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Cutting Losses Is like Buying an Insurance Policy

This policy of limiting losses is similar to paying insurance premiums. You reduce your risk to exactly the amount you are willing to take. Granted, many, many times the stock you sell will immediately turn around and go up. You will probably get very perturbed and think you made the wrong decision if the stock afterwards rebounds in price.

If you bought insurance on your car last year and didn't have an accident,did you waste your money? Are you going to buy the same insurance  this year? Of course you are!
Did you buy fire insurance on your home or business last year? If your home did not burn down last year, are you upset because you made a bad financial decision? You don't buy fire insurance because you know your house is going to burn down. You buy insurance just in case, to protect you from the remote possibility of a serious loss. It is the same for the winning investor who cuts losses quickly and closely; he or she wants to protect against the possible chance of a larger potentially devastating loss from
which it may not be possible to recover.

Some people have even damaged their health agonizing over declining stocks they were holding. In this situation, it is best to sell and stop worrying.

I know a stockbroker who bought Brunswick in 1961 at $60. When it dropped to $50, he bought more, and when it dropped to $40, he added again. When it dropped to $30, he dropped dead on the golf course. Never argue with the market—your health and peace of mind are always more important than any stock!

Small losses are cheap insurance and the only kind of insurance you can buy on your investments. Even if a number of the stocks move up after you sell, which many of them surely will, you have accomplished your critical objective of keeping all your losses small. And you still have your money to try again for a winner in another stock.

If you can keep the average of all your mistakes and losses to 5% or 6%, you will be like the professional football team that opponents can never score yardage on. If you don't give up many first downs, how can they ever beat you?

Limit Your Losses to 7% or 8% of Your Cost

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Limit Your Losses to 7% or 8% of Your Cost

Individual investors should consider adopting a firm plan to try to limit the loss on initial invested capital in each stock to an absolute maximum of 7% or 8%. Because of position size problems and broad diversification which lessen risk, most institutional investors do not usually follow such a quick loss-cutting plan. This is a terrific advantage you, the individual investor, have over the institution, so use it.I am talking about cutting your loss when it is 7% or 8% below the price you paid. Once you are ahead and have a good profit, you can afford to, and should, allow the stock more than 7% or 8% room for normal fluctuations in price. Do not sell a stock just because it's off 7% to 8% from its peak price.

When the late Gerald M. Loeb of E. F. Hutton was writing his last book on the stock market, I had the pleasure of discussing this issue with him in my office. In his first work, The Battle for Investment Survival, Loeb advocated cutting all losses at 10%. I was curious and asked him if he followed the 10% loss policy himself. He said, "I would hope to be out long before they ever reach 10%."

Bill Astrop, president of Astrop Advisory Corporation in Atlanta, Georgia, suggests a minor revision of the 10% loss-cutting plan. He feels individual investors should sell half of their position in a stock if it is down 5% from their cost and the other half once it is down 10% below the price paid.

To preserve your hard-earned money, I think 7% or 8% should be the limit. Your overall average of all losses should be less, perhaps 5% or 6% if you are strict and fast on your feet. There is no rule that says you have to wait until every single loss reaches
7% to 8% before you take it. On occasion, you can sense that the market or your stock isn't acting right or that you are starting off amiss.Then you can cut the loss sooner, when a stock may be down only one or two points.

ALSO, 7% TO 8% BELOW YOUR PURCHASE PRICE IS THE ABSOLUTE LIMIT. Once you get to that point, you can no longer hesitate. You can't think about it or wait a few more days to see what might happen. It now becomes automatic—no more vacillating—sell, and sell immediately at the market. The fact that you are down 7% or 8% below your cost is the reason you are selling. You don't need any other reason. At this time nothing else should have a bearing on the situation. 

When Does a Loss Become a Loss?

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When Does a Loss Become a Loss?

When you say, "I can't sell a stock because I don't want to take a loss," you assume that what you want has some bearing on the situation. Yet the stock does not know who you are, and it doesn't care what you hope or want.

Furthermore, you may believe that if you sell the stock you will be takingthe loss, but selling doesn't give you the loss; you already have it. If  you think a loss is not incurred until you sell the stock, you may be kidding yourself. The larger the paper loss, the more real it will become.

For example, if you paid $40 per share for 100 shares of Ace Chemical, and it's currently worth $28 per share, you have $2800 worth of stock that cost you $4000. You have a $1200 loss. Whether you convert it to cash or hold the stock, it is only worth $2800.

You took your loss as this stock dropped in price even though you didn't sell; now you will probably be better off selling the stock and going back to a cash position. You can think more objectively with cash in your stock account than you can if you're worrying about a stock that has lost money for you. Anyway, there are other securities where your chance of recouping your loss could be far greater.

Here's another suggestion that may help you decide whether or not to sell. Pretend you don't own the stock and you have $2800 in the bank. Then ask yourself this question, "Do I really want to buy this stock now?" If your answer is "no," then why are you holding it?

How the Normal Investor Thinks

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How the Normal Investor Thinks

Let's examine how the normal investor thinks and makes decisions. If you are a typical investor, you probably keep records of your transactions in the market, perhaps in the following manner:

When you think about selling a stock, you likely look at your records to see what price you paid for the stock, don't you? If you have a profit, you may sell; if you have a loss, you will wait rather than take the loss. After all, you didn't invest in the market to lose money.

So, in this example, you may decide to sell your Luby's Cafeterias or Wal-Mart Stores stock because they show a profit. But these are the stocks you should consider keeping. Instead, you should probably sell one of the stocks showing a loss, like Navistar or Storage Technology.

If you're the type of person who would have been inclined to sell Luby's, the entire basis of your sell decision is unwise, resulting from the "price-paid bias" which 95% of investors have.

Suppose you paid $30 for a stock two years ago. Today it is $34. You may sell it because you've made a profit. But what does the price you paid for that stock two years ago have to do with its worth today—or whether it should be held or sold now?

Suppose you paid $40 for the same stock six months earlier and, therefore, have a loss today. Does this change its future potential? Probably not! What you paid for a stock years ago or whether you have a profit or loss may have little to do with future potential. 

Should You Have Several Brokerage Accounts?

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Should You Have Several Brokerage Accounts?

Some customers have accounts with two or three different brokers. In most cases such a practice is silly, since your account won't be as important to any one broker. You may also receive conflicting advice, which will be confusing and costly. Money is made in the stock market by concentrating, not scattering. The same should go for your brokerage account. Concentrate your activity with the best stockbroker you can find. If this doesn't work well after a year or two, change and find another broker.

If you are more accomplished and make your own buy-and-sell decisions, you might want to consider a discount broker. You could save as much as 50% on the cost of commissions. Discount brokerage firms have grown and increased their share of the retail securities business ever since the advent of negotiated commissions in May 1975.

If you don't know the name or location of a stock brokerage firm that is a member of the New York Stock Exchange, look in the yellow pages of your local telephone book. The reason I suggest a New York Stock Exchange firm is that NYSE membership in the securities industry is a little like the Good Housekeeping seal of approval. It certainly doesn't guarantee you will make money; however, you will be dealing with a more substantial organization. Members usually pay several hundred thousand dollars or much more just to buy a seat on the New York Stock Exchange.

Stock exchange firms also have many rules and regulations to which they must adhere. And they are subject to surprise audits and annual examinations from the stock exchange.

Conversely, some firms that are only members of the NASD, the National Association of Securities Dealers, and perhaps a local or regional exchange, may have too easily gained entrance into the securities business. They may not be backed up with as substantial a capital base.

If you've never opened an account with a brokerage firm, don't be timid or reluctant to visit one. It's simple and easy, just like opening an account with your local bank or savings and loan. You will have to fill out and sign new account papers before you will be able to buy or sell any stock. You may open a single account or, if you're married, you may want to open a joint account. The broker will also ask for credit references,
such as your bank. All brokerage firms have a regular commission schedule which they should be able to show you. The commission generally averages from 1% to 2% to buy or sell a stock.

When you buy or sell stock, you will receive a confirmation in the mail (a small slip of paper) which will show what stock you bought or  sold, the price paid or received, the commission paid, and the total dollar amount you owe or will receive if you sold a stock. It will also show the settlement date by which the transaction must be settled.

It's best to pay these bills immediately on receipt since they will be due in a few days. Stock certificates must be delivered to your broker properly endorsed without delay when you wish to sell a stock, otherwise the transaction can't be settled on time. Sometimes stock powers (legal endorsements) can be signed and mailed separately to your broker.

It is usually more convenient for both you and the NYSE firm to hold your stock certificates in street name (the brokerage company name), where they are held in safekeeping for you by the brokerage firm. All accounts are insured to $500,000 by the Securities Investor Protection Corporation, and additional insurance is carried by most firms. Certificates are kept in a vault, so they should be safer than if you try to take care of them yourself. 

Finding a Broker, Opening an Account, and What It Costs to Buy Stocks

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Finding a Broker, Opening an Account, and What It Costs to Buy Stocks

Branch offices of most New York Stock Exchange firms have a broker of the day. He or she will probably be called a registered representative (RR), an account executive (AE), or an investment consultant (1C). This is the person you will likely talk to if you visit a broker's office looking for information or to open an account.

How do you find a competent stockbroker? I suggest you follow a slightly different procedure. Go to the office of the firm you choose and ask to see the office manager
or vice president in charge of the office. Introduce yourself to the manager. Say you are considering opening a new account but would like to deal with a broker that has definitely been successful at making money in his or her own personal account and for most customers' accounts.

This person should have already been a broker for two or three years or more and possibly be 27 or older. But don't be too impressed with age. The registered representative you're looking for could be young, middle-aged, or older. Age or years of experience is certainly no sign that a broker is a very successful student of the stock market. Did you ever hear the story about the schoolteacher who had 25 years' experience but was turned down for a job by a new principal? The principal felt the teacher didn't have 25 years' experience, but just
one year's experience 25 times over.

Ask Questions....It's Your Money

When you meet the broker recommended to you, ask how he or she gets stock ideas and research information. Don't be afraid to ask a lot of questions. It's your money.

You could ask about the broker's investment philosophies, beliefs, and methods. What are two or three of the best stock market books he or she has read? If the broker can't easily name a few, then maybe you should be a little cautious.

If the broker relies solely on his or her own firm's research department for ideas, information, and reports, you may be better off visiting with a few other brokerage firms before you decide where to open your account.

The better brokers will show more initiative, perhaps by subscribing to a chart service or Investor's Business Daily on their own, and will probably have several other sources of information, ideas, and research.

Following brokerage firm research department reports is not necessarily an outstanding way to find money-making investment ideas. When I was a broker with a major New York Stock Exchange firm years ago, I never followed any of the firm's research because it wasn't too astute. Brokers that have attended Investor's Business Daily all-day workshops certainly should be far more knowledgeable than those who haven't.

The Best Monetary (Money) Indicators

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The Best Monetary (Money) Indicators

Money market indicators mirror general economic activity. I follow selected government and Federal Reserve Board measurements, including 10 indicators of the supply and demand for money and indicators of  interest rate levels.

History proves that the direction of the general market, as well as of several industry groups, is often affected by changes in interest rates. Because the level of interest rates is usually tied to Federal Reserve tightor- easy monetary policy, you may want to be aware of measures such as reserve requirements for member banks, the Ml and M2 money supply percent rate of change, federal funds rate, consumer price index, memberbank reserves, ratio of government securities holdings to bank loans, 90-day Treasury Bill yields, and U.S. Treasury Bond prices.

These monetary indicators might help you anticipate future government policy decisions and their effects on the stock market, individual stocks, and the American economy. Changes in 90-day Treasury Bill rates and the erratic and tricky Fed Funds rate sometimes help predict impending discount rate changes. The monetary base and the velocity of money are other important measures used by professionals. The Fed also watches economic data such as unemployment figures and Gross National Product (GNP) changes.

Don't be discouraged if the subject of monetary indicators seems complex; it is. Few economists, few presidents, virtually no one in Congress, and even few people at the Federal Reserve, including some heads of the Fed, understand it as well as they should. This is just one of the many reasons why the Fed should probably remain relatively independent and not subject to political control or extreme pressure from the Congress. It might, however, be constructive to let the term of office for the head of the Fed coincide with the presi- For the investor, the simplest and most relevant monetary indicator to follow and understand is the changes in the Federal Reserve Board discount rate. With the advent of program trading and various hedging devices, some funds use such techniques to hedge portions of their portfolio in an attempt to provide some downside protection during risky markets. The degree to which these are successful again depends greatly on skill and timing, but one possible effect for some managers may be to lessen the pressure to have to dump portfolio securities on the market.

More and more funds operate under a plan of very wide diversification and a fully or near fully invested policy at all times. This is because most managers have difficulty in getting out and into cash at the right time and, most importantly, then getting back in fast enough to participate in the initial powerful rebound off the ultimate bottom.