Right Now is When You Make Your Money
by Dr. Steve Sjuggerud
May 26, 2006
You might have thought you were a brilliant investor this year…
But the reality is, up until two weeks ago, your investment decisions really didn’t matter…. You could have bought just about anything, and it would have gone up.
That’s all changed in the last two weeks.
For the first time this year, the decisions you make RIGHT NOW really matter… I believe they will be the difference in whether you make or lose money this year.
I described what you need to do in this Tuesday’s edition of DailyWealth.
In short, I said “In order to prevent your financial future from getting wiped out - either now or someday down the road - what you must do is commit to investing in a limited-downside, unlimited upside way.”
Today, I’ll show you how I do it…
To permanently ensure that your portfolio’s going in the right direction, all you need to understand is a little simple math…
If your upside potential in any given position in your portfolio is hundreds of percent, but if your downside risk is only at 15% to 25% off the highs, chances are you’ll never lose much money.
Again, think of it like a poker game that lasts your entire life… In order to grow the biggest pot by the end, you must inevitably fold a bunch of hands. You must give up a lot of battles to win the war.
If you follow this, I strongly believe that, in the long run, you’ll make a fortune. And your portfolio will never experience a “catastrophic” loss that’s extremely difficult to recover from. That’s comforting.
We had a good example in yesterday’s DailyWealth… we placed a chart of Florida land stock St. Joe at the bottom of the letter. Three years ago, St. Joe was a $30 stock. Last summer, the stock hit $85. The stock had soared nearly 200% in just about two years, with barely a correction along the way. The story hadn’t changed at all. People just decided they wanted Florida land.
Now – less than a year later – the stock is under $50 bucks. It’s been going down since last summer, without stopping. Where’s the bottom? I don’t know. But the legendary Jim Rogers quote sure applies: “markets can fall farther than you can possibly imagine.”
Has anything changed at St. Joe? Not that I know of (though I don’t really follow the stock).
With a 15% trailing stop, you would have pocketed almost all of those gains over the last three years… You’d have bought at $30, seen the stock peak at $85, and you would have sold at $72+.
Now the stock’s at $48, and its freefall continues. Though nothing’s wrong with the business… investors have decided they don’t want exposure to Florida real estate.
We can’t know in advance when a boring land company will soar by 200%, or crash by 45%. We can’t know when speculative frenzies will kick in, or when stocks will crash.
But if we position ourselves where we can participate in the frenzies, and be able to avoid the meltdowns completely, then we’re doing the right thing.
So how do we do it?
With trailing stops, of course. The idea is incredibly simple. When a stock falls by a predetermined amount, you get out – no if’s, and’s, or but’s. I generally advocate a trailing stop of 25%. So if you bought a stock at $10, then soars to $20, and then falls back to $15, it’s time to get out… the stock has fallen by 25% off its closing high since you bought it.
Amazingly, when I started advocating trailing stops a decade ago, there was no easy way to track them.
Now, thanks to the success of my newsletter True Wealth, two great guys have developed fantastic computer programs to track them for you. I use both of them.
The first one is www.tradestops.com. It was developed by Richard Smith, a True Wealth reader with a PhD in math. He discovered what I discovered… there was no easy way to do it. So he created a simple, internet-based product that tracks stops and even sends an email when one is hit.
Another program I use is XLQ (www.qmatix.com). TradeStops is the simple one… XLQ is for those of you that really like to tinker with things…
XLQ is not just a trailing stops program… it’s a way to bring lots of fundamental and technical stock data into Microsoft Excel and use it any way you want. For what you get, it’s incredibly cheap. It is amazing, actually, once you start scratching the surface.
You ought to have some familiarity with spreadsheet-type programs to get anything out of this. I love it.
Both XLQ and TradeStops are just great. And they’re very different. XLQ is free to try for 45 days. And TradeStops is inexpensive.
The guys behind these programs are honorable guys. They are committed to having great products. These things have been around a while, and they work well. They took my suggestions and incorporated them into their programs in years past.
I urge you to try them both. I personally use them both, and have nothing to gain from recommending them. I just like the products.
To sum up… whether you keep your trailing stop in a notebook… or one of these easy-to-use programs, you’ll get to participate in nearly all of the move on the upside, and you’ll be out before a big downside move kicks in.
It’s the way to go.
Good investing,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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