How You REALLY Make Money Investing
By Dr. Steve Sjuggerud
June 26, 2007
"Wow, that's really important, Steve. Have you ever explained that to your readers before?" Matt Badiali asked me.
"I don't think they really want to hear it," I said.
"You've got to tell them, it's how you really make money investing!" he said. So here it goes…
Back when I was a broker, I saw what hundreds of investors did with their money. Most of them did the same wrong thing…
Typically, once an investor saw a 15%-20% profit, he took it. "No one ever went broke taking a profit!" I often heard. But if an investor saw a 15%-20% loss, they'd keep holding the stock, hoping it would come back.
By the end of the year, your average investor would have taken a half dozen 15% profits, and he'd be sitting on a portfolio of a half-dozen or more losers, watching them go lower. "It ain't a loss until you take it!" I also often heard.
This is not how you make money investing. Actually, it's a sure way to the poorhouse.
The problem is clear… the average investor limits his upside potential on his winners to 15%. But since he won't sell a loser, his downside risk is 100%. This is exactly the opposite of how you make money...
Making money in your investments is a bit like poker… it's mostly in how you play your cards.
People don't want to hear it… They don't want to believe it… But in investments, just as in poker, it's quite all right to fold many times. Having many small losers is fine… you're simply treading water as you set yourself up for the right hand – the big one that makes your night at the card table or your year as an investor. And that's what I explained to Matt.
My newsletter Sjuggerud Confidential is a good example of this… We have a handful of recommendations that are treading water, some up, some down. But in one particular case, we were dealt an excellent hand…
I recommended Seabridge Gold in Sjuggerud Confidential two years ago at a price of $2.64 a share. We didn't do what the average investor does… we didn't sell when it was up 15%. Or 20%. We didn't even sell when the stock was up 200%.
Now, readers of Sjuggerud Confidential are up about 600% on my recommendation of Seabridge Gold. A $10,000 investment would be worth about $70,000 today.
In short, we didn't sell as soon as we saw a quick profit.
In fact, I still have a "buy" recommendation on Seabridge Gold today. The value there is still tremendous. We held onto our winner.
Much of investing is "treading water" until you get a big one. How you handle that big one is the difference between making a fortune from your investments and just "treading water" for life.
A big one here, a big one there, they make all the difference. They carry the load for the whole portfolio.
My friend Alex Green once explained it as well as I've ever heard it. He said, "Treat your portfolio like a rose garden… trim the weeds and let the roses fully bloom."
Sadly, most investors don't do this. They don't trim their weeds. And they don't let the rose fully bloom. Therefore, they're doomed to "treading water for life" returns.
When the time comes to do the right thing, it is hard to do. It feels wrong. It's much easier to hold on and put it in the back of your mind. But the way you really make money in your investments is to be willing to take small losses, and to be willing to let your winners run.
If you want to have a Seabridge-type winner sometime in your life, you simply can't sell as soon as you see a 20% profit.
I know this advice is more valuable than any stock tip – or any other piece of advice – I can give you. Be tough. Don't be an average investor. You can do this. And chances are, it will make you a fortune…
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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