Richard Smith has a Ph.D. in mathematical probabilities... and he still managed to lose 80% of his money in the stock market.
After that humbling experience, he was determined not to let it happen again. In short, he solved his problem... and I'll share his solution with you today.
Richard is a friend of mine. He's visiting this week, and he reminded me how he made the worst mistake of his investment career...
I started investing in the late '90s. At the time I was working on my Ph.D. in math, and I was engaged to be married. By early March 2000, my $5,000 account had grown to $25,000 on the back of JDSU, Broadcom, and trading on margin.
My wedding date was June 24, 2000. I couldn't wait to tell my parents and my future in-laws I had all the wedding expenses covered. Long story short, as the Nasdaq fell, I watched my big plans evaporate, telling myself (repeatedly), "I can't sell now, it's got to come back from here."
I did manage to pull the plug when the account finally returned to its initial value of $5,000, shortly before the wedding – for an inexcusable 80% loss. The folks helped out with the wedding expenses. The experience left its mark. I was determined not to let that ever happen again.
Though Richard lost 80% of his money back in 2000, his strategy for never letting it happen again is just as pertinent right now – after the 2008 bust – as it was back then...
After he saw $20,000 evaporate, Richard started reading up on investing strategies... and stumbled onto True Wealth. "It seemed that all the great investors preached cutting losses early and letting winners ride," he told me. "The exact opposite of what I'd done back in 2000."
Once Richard got the idea, he started using trailing stops with his investments. "My investment success improved dramatically," he says. "More importantly, for the first time in my investing career, I had an exit plan."
That's all a trailing stop is – an easy, automatic exit strategy. Here's how it works: Let's say a stock you bought went from $10 to $20. With a 25% trailing stop, you'd sell at $15, locking in a profit of 50%. If the stock goes to $24, then you'd exit if it fell to $18. It's 25% below the high since you've owned it. The most you'll ever lose is 25%... and a lot less than that if your stock moves higher.
If you follow your trailing stops, you'll never again suffer a catastrophic loss in the stock market. But most investors will never get it. They'll do what Richard did back in 2000... They will keep holding on to their losers.
Honestly, if you didn't learn your lesson back in 2000 (like Richard did) or last year when everything blew up... if you haven't made the simple decision to prevent yourself from blowing up again by cutting your losers early... then we probably can't help you.
We offer up our best investment ideas. But you have to be willing to admit when a "great" idea turns out to be a dud. If you're willing to sink with the ship instead of heading for the life rafts, then you don't have a chance at outperforming over the long run.
Fortunately, this stuff isn't rocket science. You can easily prevent yourself from blowing up in the markets. A trailing stop will cut your losses early and let your winners ride. Following these basic principles will help you outperform the vast majority of investors.
Good investing,
Steve
P.S. Richard got tired of keeping track of his stops by hand... and I knew the same was true for my True Wealth subscribers. So we got together and laid the groundwork for TradeStops, a program that will automatically track your stops.
Richard's program has been up and running for five years now... and has grown from a small idea to a full-time business with thousands of satisfied users. All you need is a stock symbol, buy price, buy date, and trailing stop percent. The computer does the rest... and will even e-mail or text you if a stop is hit. To get more details, click here.
A question rolls in for DailyWealth... Should I buy gold at this price?
Gold has enjoyed a 27% rally in the last seven months... so it's not your typical contrarian buy right now. But our answer to the question is, Sure. Go ahead and buy. Trying to get your position a few percent lower than today's price misses the "big picture" on gold.
Here's the big picture: Gold represents "real money." Gold is a store of wealth... not an honest-to-goodness investment. You don't buy gold expecting to get steady investment gains like you would with shares of Johnson & Johnson. Most folks who see gold as an investment or a trading vehicle usually manage to trade themselves right out of a bull market. And baby, it's a bull market...
Will gold dip down to $900 or $875 and give us a great sale price? Nobody can know the future. But once you see gold as the store of wealth it is, the price doesn't matter for long-term money. And as you can see from the "long view" of gold, holding out for a $30-per-ounce sale isn't worth missing the strongest trend in all of finance.
This Chart Is the Simplest, Best Reason to Own Gold By Porter StansberryThursday, June 25, 2009
You don't even need to know that an increase to the monetary base of this magnitude could be catastrophic. All you need to know is the government has created over 100% more of it than existed a year ago – the fastest increase of all time, by a huge amount.
The Great Recession Is Definitely Over! Where to Now? By Dr. Steve SjuggerudWednesday, June 24, 2009
In March, it was obvious we hit an extreme of negative sentiment. That was a time to buy. But now? It's not so clear-cut.
The Three Charts You Need to Watch By Tom DysonMonday, June 22, 2009
One or two stock sectors always lead the market. In the late 1990s and early 2000s, it was technology and Internet stocks. These stocks went up the most in the bull market and fell the most in the bear market.
