He Lost 80% – Now He'll Never Lose Big Again
By Dr. Steve Sjuggerud
Friday, June 26, 2009
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. |
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SHOULD WE BE BUYING GOLD RIGHT NOW?
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.
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One major reason why people own gold is that gold can't go broke. Gold can't go broke because it has no counter-parties or liabilities against it. Gold can't go broke because gold is pure wealth. Sure gold can go down in price in terms of a currency, but gold CAN NOT GO BROKE.
This is the crucial fact hat the "dollar-bugs" fail to comprehend. This is the reason why sophisticated wealthy people own large quantities of gold. Gold represents eternal unquestioned wealth.
Wealthy people do NOT hold gold for appreciation. They don't care about the price of gold today or tomorrow. That is not why they hold gold.
–Richard Russell,
Dow Theory Letters
I've honestly never cared about the price of gold – as measured in dollars – nor have I ever been interested in trading gold.
In fact, I've never sold a single ounce of gold, though I have given some away as a gift. Understanding gold has always been easy for me, intuitive even. It's the only sound, private, stable, and universally accepted form of money. An ounce of gold is no one else's liability. It's easy to hide, easy to transport, and easy to divide.
In my mind, the battle between the value of the dollar and the value of gold is simple.
Gold stands for honesty and permanence and has for all of recorded human history. It is the physical manifestation of truth. There has never been a single time in all of history where an ounce of gold failed anyone, ever. Paper money, on the other hand, stands for fraud and deceit. It is the physical manifestation of a lie. And it has been for all of recorded human history. There isn't a single historical example of a paper currency that didn't fail everyone who held it.
– Porter Stansberry,
S&A Digest
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This Chart Is the Simplest, Best Reason to Own Gold
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Wednesday, June 24, 2009
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Tuesday, June 23, 2009
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Monday, June 22, 2009
This Commodity Is Super Cheap... and 100%+ Gains are on the Way
Saturday, June 20, 2009 |
Interview with Jim Rogers produces AWESOME rants
If you do just one thing today, make sure to read this interview. If you do just two things, read it then pass it on to everyone you know.
Maria Bartiromo just interviewed legendary investor Jim Rogers. There are several great observations: Freddie Mac makes Enron's accounting look honest... Obama is clueless... let everyone go bankrupt... get long agriculture. |
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