My Big Mistake... And How I Made a Safe Getaway
By Dr. Steve Sjuggerud
March 29, 2007

I made an "ultracontrarian" call in the November issue of my True Wealth newsletter...

I recommended buying shares in the homebuilding sector – D.R. Horton to be exact.

In hindsight, obviously, it turned out to be a big mistake...

The call sure started out well. From November 1 to February 1, shares of D.R. Horton rose by 29%. Then the subprime mess cranked up...

A few weeks ago, the time came to sell our D.R. Horton shares, at loss of about 1%. I told my readers:

"We got the big-picture call right about the markets – that there was no fear out there, and that fear would return. But the big sector bet we put on in the November issue – that homebuilding stocks were cheap and would be okay – appears to be wrong. We've hit our trailing stop on D.R. Horton. We must cut our losses on the homebuilders. Do it now, if you haven't already." I cut my personal loss, too... I bought a homebuilder ETF, and my loss was worse than the 1% that readers lost if they followed my investment advice and sold D.R. Horton.

Of course, I didn't want to sell. My pride was hurting. I believed the stock market had priced in the worst for the homebuilders. And I was pounding the table to buy them to anyone who would listen.

It was a tough thing to write. But I continued: "I urge you to close out your positions in homebuilders. We've hit our stops, and the stocks are approaching their six-month lows. The picture is ugly and could get worse. Remember, we want to buy when things go from bad to less bad. The last few weeks have been the opposite of that in homebuilding stocks... so let's move along."

Fortunately, in hindsight, we prevented a small mistake from becoming a much bigger one...

Did readers follow the advice and cut their losses? At least some did not... 

I recently heard that two friends who follow my writings have held onto their positions in the homebuilders. I appreciate their faith in my idea... but holding on now is a bad idea!  

If the guy who made the recommendation (that's me) said "sell" and is out of the trade himself, what are you still doing in it?

My two friends lost more money yesterday... I'm sure you heard that homebuilder Beazer Homes announced it's under investigation by the FBI, the IRS, and other government agencies yesterday. Shares of Beazer fell 8.4% on the day. It brought on another decline in entire homebuilding sector.  

Yesterday's loss for my friends needs to be racked up as what I call "Wall Street tuition." But it's only tuition if you actually learn a lesson from the loss – then you "paid" your tuition.  

It seems that people can only learn these lessons when real money is on the line. 

Okay. So we're out of the homebuilders now... but when could we re-enter the homebuilder trade if we wanted to? 

About a decade ago, my friend Porter Stansberry and I established our own rules for when we can re-enter trades we've stopped out of...

Importantly, these rules aren't based on any financial theory, they're there to keep our egos and emotions in check. They're in part based on our thoughts about the book Market Wizards... and how the legendary traders in the book said "cut your losses short and let your winners run."

First, there's the "six-month cooling off period" rule: We have to wait six months before we're allowed to consider re-entering a trade that went against us.

And second, there's the "new highs" rule: If the stock hits a new high, its recent problems are now water under the bridge, and you may consider re-entering the trade.

Those rules are for when we could re-enter the trade. It doesn't mean we will. 

Wrapping up, I didn't want to exit the homebuilders... I'd strongly made the case to get in. I still believe they'll go up by hundreds of percent in the next 30 months.  

However, I made a mistake on this one. So in order to increase my odds of staying in the money, I cut my losses early.

I highly recommend you do the same – always.

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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