The Two Things That Mattered Most
By Dr. Steve Sjuggerud
January 8, 2006

Last year was a great year in my own stock portfolio. In particular, I did two things right... and they really paid off.

These two things are actually the same two things that I try to do every year. They have proven themselves to be the secret to exceptional returns. I’ll share them with you today...

I’ve been writing an investment letter for about a dozen years. Just before I started writing my letter, I made a decision that ultimately changed my life...

Before I started, I’d worked in every aspect of the investment business... I’d been a broker, I’d been in research, and I even ran a mutual fund. But I was a traditional guy. In school, I had been taught the traditional ideas about investing, right through the Ph.D. level.

But when the time came to have my own investment letter, with my own name on the line, I took on a new focus. I decided I was going to study the world’s most successful investors, and try to do what they do.

So I read every book I could that was either written by a successful investor or contained interviews with successful investors. I wanted to know exactly what they did to make money.

One book in particular – Market Wizards: Interviews with Top Traders by Jack Schwager – made a big impact on me...

I was amazed that the extremely successful investors interviewed in that book didn’t talk much about what I’d learned in school at all. They invested completely differently, in fact.

All of the spectacular investors interviewed (but one) had one thing in common: They saw cutting your losses and letting your winners ride as a key to their investment success.

Now, in all of my schooling, this idea never came up. I couldn’t believe it.

Probably the most influential investor in the book for me was Jim Rogers. Jim did something else much different than what was taught in school. Instead of making a zillion trades a year, or having hundreds of different positions at any one time, Jim just waited...

In his interview, Jim said he doesn’t invest until it looks like there’s “a pile of money in the corner, just waiting to be picked up.” Jim said that he might commit big money to only two or three trades a year.

That’s what I did. I only made three big stock trades in 2006. (I have a handful of “core” positions as well, but I only committed big money three times.) The first big trade was in a British small-cap stock. I made my largest trade ever, buying it in early 2006. Today, the stock is up by triple digits, percentage-wise.

I followed Jim Rogers’ rule, and made a big commitment to the idea when it appeared like it was just a pile of money in the corner waiting to be picked up. And I followed the investment advice of the other guys in Market Wizards... I’ve let my winner ride and haven’t sold a share.

For my second big trade in 2006, I bought RYVYX in mid-July, a mutual fund that attempts to earn double what the Nasdaq 100 earns. I sold it at the end of November for about a 40% profit. Not bad for 18 weeks in an index fund.

The last position I made a big commitment to last year was homebuilding stocks. In late 2006, I took a big position in shares of a homebuilder ETF. It’s up a bit so far, but I plan on holding for two or three years. I think I have triple-digit upside and limited downside. Following the advice of successful investors throughout history, I’m using a trailing stop to cut my losses if I’m wrong. Otherwise, I’ll continue sticking with the advice of the legends and let the winner run.

I urge you to do the same. Cut your losses (use trailing stops!) and let your winners ride. And instead of having so many positions that you neutralize the effect of any one position, have a just a few meaningful positions instead. (Any more than 20 positions and you start to dilute the potential impact of any one position.)

These two things continue to work for me. They’ve worked for legendary investors for generations. And they will work for you too, if you let them.

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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