"Sell the losers and let the winners keep riding"

The rule to "Sell the losers and let the winners keep riding" (often phrased as "Cut your losses short and let your profits run") is fundamental to long-term investing success, yet it is one that investors most commonly fail to follow due to behavioral biases.

Here is an elaboration on why this principle is so indisputable, and the psychological pitfalls it helps investors avoid.

---

The Principle: Sell the Losers and Let the Winners Keep Riding

This principle is about maximizing the benefits of your correct investment decisions and minimizing the damage from your incorrect ones.

1. The Power of Riding the Winners (Gains)

• Compounding at Work: The goal of long-term investing is to allow compounding to work its magic. When you sell a winner after a pre-determined, small gain (e.g., selling after a 50% rise), you cut off the exponential growth potential.

• The Law of Percentages (Working for You): Once a stock has already doubled or tripled, subsequent small percentage gains translate into massive dollar gains on your original investment. A winning stock only needs to rise by $1\%$ to give you a substantial return on a position that has already grown large.

• Quality Pays Off: High-quality companies that are successful often continue to be successful. Selling them prematurely assumes the market has already fully recognized their value, which often isn't true over a multi-year horizon. As the article states, "No one in the history of investing with a 'sell-after-I-have-tripled-my-money' mentality has ever succeeded."

2. The Urgency of Selling the Losers (Losses)

• Loss Recovery Math: The math behind losses is brutal. The larger the loss, the greater the percentage gain required just to break even.

  • A $20\%$ loss requires a $25\%$ gain to break even.

  • A $50\%$ loss requires a $100\%$ gain to break even.

  • A $90\%$ loss requires a $900\%$ gain to break even.

• Capital Preservation: Selling a loser quickly preserves the remaining capital, allowing you to reallocate that money to an investment with a higher likelihood of generating a profit (i.e., your winners or a new high-conviction idea). Holding onto a hopeless stock ties up capital that could otherwise be working for you.

• Avoiding the "Wish and a Prayer": The longer you hold a loser, the more the decision shifts from rational analysis to emotional "wishing and praying" for a rebound. This is not investing; it's gambling.

3. The Psychological Trap: The Disposition Effect

The biggest obstacle to following this rule is a behavioral bias known as the Disposition Effect. This is the tendency of investors to:

• Sell Winners Too Early: Driven by pride and risk aversion over gains. Realizing the gain gives an immediate feeling of success, and investors fear that the winner will drop back down before they can "lock in" the profit.

• Hold Losers Too Long: Driven by loss aversion and the sunk cost fallacy. Investors feel the pain of a loss twice as strongly as the pleasure of an equal gain. They refuse to sell because realizing the loss means admitting the mistake and closing the mental account at a loss. They hold on, hoping to just "get back to even."

Behavior	Emotional Driver	Result
Sell Winner	Pride, Fear of Regret (Missing out on locking in a gain)	Caps potential profits; limits compounding.
Hold Loser	Loss Aversion, Sunk Cost Fallacy (Refusal to admit mistake)	Exposes capital to greater losses; ties up funds for better opportunities.

4. Practical Implementation

To overcome the emotional biases, implement a disciplined system:

• Establish a Stop-Loss (for Losers): Decide before you invest at what point the fundamental thesis is invalidated, and set a maximum loss you are willing to tolerate (e.g., sell if the stock drops $15\%$ or $20\%$).

• Define a Rationale for Selling (for Winners): The only acceptable reason to sell a winner is that the company's fundamentals have deteriorated (the original thesis is broken), or you have found a significantly better opportunity (opportunity cost). Do not sell simply because the stock is "up a lot."

• Revisit Your Thesis: When a stock falls, revisit your original research. If the company's long-term prospects are unchanged, the dip is a sale. If the core business has fundamentally deteriorated, it's a sell, regardless of how much money you are losing.

This principle is about acting like a cold, rational business owner who cuts failing ventures quickly and generously funds the successful ones, rather than an emotional gambler clinging to past hopes.

Strategies for Assessing a "Loser" Stock (The Permanent vs. Temporary Problem)

 

Strategies for Assessing a "Loser" Stock (The Permanent vs. Temporary Problem)

The core challenge in managing a losing stock is distinguishing between a temporary setback (which may be a buying opportunity) and a permanent, structural deterioration of the business (which requires selling).

Here are the key strategies for assessing whether a declining stock is a loser to be sold, or a high-quality asset on sale:

---

1. Re-Examine the Original Investment Thesis

The single most important question is: Have the fundamental facts that led you to buy the stock permanently changed for the worse?

• Temporary Problem (Hold/Buy More): The price has dropped due to short-term, cyclical, or macro factors (e.g., a recession, general market panic, a temporary commodity price swing, a poor quarter due to a one-time charge).¹ The long-term earnings power and competitive advantage are still intact.

• Permanent Problem (Sell): The price has dropped because the core reason you invested is no longer valid. This includes:

  • Loss of Competitive Edge (Moat Erosion): A key competitor has introduced a disruptive technology that fundamentally threatens the company’s business model.

  • Industry Obsolescence: The entire industry is in secular decline (e.g., Blockbuster video).

  • Major Management Change: Key leadership that drove the company's success has unexpectedly departed, and the replacement lacks vision or competence.²

2. The Fundamental Red Flags (Signs of a Value Trap)

A "loser" stock that keeps falling often turns out to be a "value trap"—a stock that looks cheap by traditional metrics but is cheap for a very good reason.³ Look for these fundamental red flags in the financial statements and operations:

Red Flag	Financial/Business Metric to Check	Implication (Permanent Deterioration)
Deteriorating Profitability	Declining Revenue Growth & Margins: Is the company consistently losing market share or is it unable to pass on rising costs to customers?	The core business model is breaking down.
High Financial Risk	Debt-to-Equity Ratio / Interest Coverage: Does the company have excessive leverage that puts its survival or future dividend payments at risk?	The company may struggle or fail in an economic downturn.
Poor Capital Allocation	Return on Invested Capital (ROIC): Is the management failing to generate sufficient returns on the money they reinvest back into the business?	Management is compounding bad decisions and destroying shareholder value.
Management Credibility	"Over-Promising and Under-Delivering": Has the management repeatedly missed its own financial guidance or engaged in aggressive/opaque accounting practices?	Lack of trust and competence, which is almost impossible to fix quickly.

3. Compare Against Benchmarks and Peers

A stock that is down 10% in a month might not be a loser if the entire sector is down 20%. Context is vital:

• Benchmark Comparison: Review the stock's Total Returns (including dividends) over 1, 3, and 5 years against a relevant broad market index (like the S&P 500) and your expected average annual return (e.g., 10%).

• Competitor Comparison: How is the stock performing relative to its closest peers? If your stock is down 15% but its main rival is up 10%, the problem is almost certainly company-specific and likely warrants a sale.

4. Psychological and Portfolio Discipline

Recognizing a loser stock is also about overcoming behavioral biases:⁴

• The Sunk Cost Fallacy / Disposition Effect: Investors tend to hold onto losers too long (hoping to break even) and sell winners too early (fearing a fall).⁵ This is the exact behavior the principle advises against. Selling a loser is an acknowledgment of a mistake, which is psychologically difficult but necessary for preserving capital.

• Better Opportunities Exist (Opportunity Cost): Ask yourself: "If I had the cash from this losing stock right now, would I buy this stock again?" If the answer is no, sell it and reinvest the remaining capital into a position that you have high conviction in.

• Tax-Loss Harvesting (The Silver Lining): In taxable brokerage accounts, selling a loser allows you to harvest the capital loss to offset capital gains realized from your winners, thereby reducing your tax liability.⁶ This can make the emotional pain of realizing the loss easier to swallow.

The final decision should always be based on objective fundamental analysis—the deterioration of the underlying business—and not the mere fact that the stock price has fallen

Some Investing Principles which cannot be disputed

 

Some Investing Principles which cannot be disputed

Wednesday, 2 September 2009

 https://myinvestingnotes.blogspot.com/2009/09/some-investing-principles-which-cannot.html

Summary of Indisputable Investing Principles

The provided article outlines several key principles for online investors to adopt for long-term success, emphasizing research, discipline, and a focus on the big picture rather than short-term noise.

---

1. Managing Winners and Losers

This is perhaps the most difficult principle to practice:

• Ride Your Winners: Do not cap your potential returns by using arbitrary rules (like selling after a specific multiple, e.g., "sell-after-I-have-tripled-my-money"). If a stock is performing well and your research supports its future potential, let it continue to grow.

• Sell Your Losers: It is crucial to be realistic about underperforming investments. Holding onto declining stocks in the hope of a rebound can lead to substantial, potentially complete, losses. Selling losers is an acknowledgment of a mistake, but it prevents greater losses.

• Focus on Merit: In both cases, decisions should be based on research and the company's fundamental merits, not fear or rigid personal rules.

2. Research and Independence

• Ignore "Hot Tips": Never invest based purely on tips from anyone (friends, brokers, etc.). Conduct your own thorough research and analysis before committing your money. Relying on tips is a gamble and prevents you from becoming an informed, long-term successful investor.

3. Maintaining Perspective

• Don't Panic at Short-Term Volatility: As a long-term investor, ignore day-to-day or minute-to-minute share fluctuations. Short-term movements are for day traders. Your gains come from market movements over many years. Stay confident in the quality of your underlying investments.

4. Avoiding Common Traps

• Do Not Overemphasize the P/E Ratio: The Price-to-Earnings (P/E) ratio is just one of many analytical tools. Using it in isolation to decide whether to buy or sell is dangerous. It must be interpreted within a broader context and used with other analysis.

• Resist Penny Stocks: The misconception that there is "less to lose" in a low-priced stock is false. A plunge from $5 to $0 is a 100% loss, just like a plunge from $75 to $0. Penny stocks are often riskier and subject to fewer regulations.

5. Sticking to Your Plan

• Stick to Your Strategy: Many successful investing strategies exist. The key is to find a style that works for you and stick to it consistently. Constantly switching between different stock-picking strategies is counterproductive and essentially turns you into a market timer, which is usually detrimental to long-term goals.

---

The core message is to be a disciplined, informed, and realistic long-term investor who makes decisions based on objective research and company merit, rather than emotion, tips, or short-term market noise.

Sell the losers and let the winners keep riding

For long term investing success it is important to ride a winner. 

Ever so often, investors make profits by selling their appreciated online stocks, but hold onto stocks that have declined in hopes of a rebound. 

If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. 

Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice.

If you have a personal preference to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. 

No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever succeeded.

Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.

SELL THE LOSERS, LET THE WINNERS RUN.

Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.

The key to profitable investing - knowing how to capitalize successes and curtail failures.

An investor who year in and year out procures for himself a final net profit.

An investor who year in and year out who is usually in the red.

What might be the reasons to explain their different outcomes?

Is this entirely a question of superior selection of stocks?  Maybe NOT entirely.

Is this entirely a question of superior timing of buying and selling of stocks?  Maybe NOT entirely.

How good are economists in their forecasts?

In a meeting of economists, they agreed if their forecasts were 1/3 correct, that was considered a high mark in their profession.

You cannot invest in securities successfully with odds like that against you if you place dependence solely upon judgement as to the right securities to own and the right time or price to buy them.

It is also a case of knowing how to capitalize successes and curtail failures.

You have to learn by doing.

Making investing enjoyable, understandable and profitable...*

Is it not true, that the really big fortunes from common stocks have been garnered by those who made a substantial commitment in the early years of a company in whose future they had great confidence and who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."  

 
------------------


BENJAMIN GRAHAM'S 113 WISE WORDS
The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

 
-----------------
 
PHILIP FISHER'S WISE WORDS
"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

 
--------------------


Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

 

"The 4 Diseases" of Investing - Evenitis (holding to losers), Taking profits (selling winners), Over-trading and FOMO

Teaminvest Co-founder Professor John Price, recently recorded an informative 4.5 minute video about the behavioural biases that often block rational decision-making about investments.

It’s titled “The 4 Diseases”. In the video he explains the four common behavioural biases and fuzzy thinking affecting the way we assess investments. He calls them:

• Get even-itus
• Consolidatus-profitus
• Trade-a-filia
• FOMO

Watch the video and see if you suffer from any of them? - Self awareness will improve your investment decision-making!

Click on John's pic

https://lr220.infusionsoft.com/app/hostedEmail/21336/90e5395442506435?inf_contact_key=bfe1f769afcc1ca46d38151bc79936d7f17975b54721e97cab312e8b684f90d3

Regards

Mark Moreland Co-Founder NOTES: Stock selection - Read the annual reports - Read all the analysts reports - Visit the stores or use their products and services If you find that at the end of the day, the performance of the portfolio is not that good, or mediocre at best, in many cases there are various reasons. They often have not taken into account behavioural biases, the sort of fuzzy thinking that is automatically in their mind that blocks out their rational decision. These are the 4 behavioural biases, which we refer to them as:

• Get even-itus
• Consolidatus-profitus
• Trade-a-filia
• FOMO

Get even-itus

The disease of hanging onto a stock when the price has gone down until you can get even.  "Don't worry dear, it is going to come up back again."   The problem is, if the stock has gone down, the chances are it is going to continue to go down and best it is going to be a mediocre investment.  It is much better to face the fact that you have a loser, you lost money and to move on.

Consolidatus-profitus

This is the opposite to get even-itus.  This is the disease of always taking a profit when the price goes up.  It looks great and you can tell your friend at the dinner party that your stock went up 20%, 40% or 50% and you sold it.   The problem is what you are going to do with that money.  Studies have shown, on average, people who sell just to take a profit end up putting their money back into the market in a stock that underperforms the one they got out of.  #

Get even-itus and Consolidatus-profitus are two sides of the one coin; generally hang on to losers and sell winners.  The opposite would be better, that is, sell your losers and hold on to your winners.  They water the weeds and cut the flowers.  It would be better they  water the flowers and cut the weeds.

Trade-a-filia

This is the disease of just loving to trade. Most people who would never dream of going to casino betting on roulette or any of the casino games or machines,yet when they are on their internet and looking at their stocks, they trade far too often.  It is so simple to trade on the internet and they get drawn into it.  But studies have shown that on average, the more a person trades they worse they do. I am not referring to their transaction costs but actually their performance diminishes.  Instead of looking for great companies that are going to make you money year after year, they think they can get a short term profit.   In the short term, the share prices are much more random than most people believe.  So this is a disease of trading too often.  In this regard, women are better investors than men, because overall, women trade less than men.  

FOMO

This is the 4th disease, the FEAR OF MISSING OUT.  You read about a particular stock and its price is going up and you think, if I don't get in now, I am going to miss out, instead of taking your time and evaluating the stock properly.   

These 4 diseases really work together and at best give you a mediocre performance that is far far below you optimal performance.  

You should work to eliminate these 4 investing biases or diseases, consciously.  Use tight filters to filter out the best companies to concentrate in.  

Be alert that you are not slipping into these investment biases.  Eliminate these investing biases and your performance will be much better. 

# Reinvestment risk.

Invest like Buffett - Hold on to your Winners Forever

Best holding period is holding forever.
Sell your losers, hold on to your winners.

SELL THE LOSERS, LET THE WINNERS RUN.
Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.

< I suggest this video: http://www.youtube.com/watch?v=WVqyCRYBieI >
Newbie
on 4/7/13

Thanks to Newbie for highlighting this video to me.

SELL THE LOSERS, LET THE WINNERS RUN.

Losers refer NOT to those stocks with the depressed prices but to those whose revenues and earnings aren't capable of growing adequately. 

Weed out these losers and reinvest the cash into other stocks with better revenues and earnings potential for higher returns.

How to Not Ruin Your Portfolio

How to Not Ruin Your Portfolio


By Abraham
Jul.15, 2010

Today’s article isn’t really a screen (although I do have one at the end). I want to talk about something that I believe is critically important in light of what’s been happening in the market.

And that’s about managing your risk — using stops, cutting your losses — all of that stuff.
Not a fun topic, but probably one of the most important for right now.

What’s interesting is that nobody ruins their portfolio when the market is going straight up. It’s when the market goes down that people get into real trouble.

But ironically, it’s when the market is going up that a lot of these bad habits are created.

The problem is that even bad decisions are oftentimes rewarded in a bull market. But when the market is going down, there’s no mercy for bad decision makers. Sitting on losses in hopes of them coming back can ruin your portfolio as they grow bigger.

I like using a 10% stop loss rule because it’s kind of a tit for tat. If you lose 10% on a trade, you only need a little bit more than 10% to get that money back (11.1%).

But if you lose 20%, you now need a 25% gain to get that money back.

And it gets worse as it goes down.

If you lose 30%, you now need nearly a 43% return to get back to where you were.

And if you lose 50% — you now need to pull out a 100% return to get back to even. (And if you’re so slick that you can pull a 100% return out of your hat at any time, why did you just get clobbered for a 50% loss?!)
So I think it’s important to keep your losses small.

Why do so many people find it hard to cut their losses short?

I think a lot of people hate taking losses because they fear that if they get out, and the market goes back up, they’re going to miss out on the move.

Like somehow, they’re going to get out and it’s going to go up a million percent without them.
First off, that’s nonsense.

Just give yourself permission to get back in.


If the stock does go back up and a paul smith sale big move ensues, the 10% you gave up won’t really matter.

Of course, you don’t want to get back in the moment it goes a tick above where you got out. Give it some proving room. But if there’s a compelling reason to get back in, do so.

Don’t hang onto losers for fear that they’ll all of a sudden become big winners once you get out. You can always get back in. But every losing trade begins with the investor believing that it was going to be a big winner too – otherwise they wouldn’t have made that trade in the first place.

In stocks, nobody is 100% right. So knowing that – take your losses when a trade is not working out and move on to another higher probability trade.

Plus, it can help you stay focused. By keeping your losses small, you won’t  get gun shy on your next trade.

Stock Screen

One of the ways to minimize your downside, in my opinion, is to find stocks outperforming the market.
A simple screen I’ve been running is to look for the top 100 companies that have outperformed the S&P 500 the most.

I add in the Zacks Rank and price and volume constraints (> $5 and > 100,000 shares) to first narrow the universe down. But then I’m looking for the top 100 stocks with the greatest Relative Percentage Price Change over the last 24 weeks.

And you get a lot of interesting companies across all different sectors and industries.

Here are 5 that came through this list for Tuesday, 9/16/08:




http://abraham.ilikehandbag.com/2010/07/15/how-to-not-ruin-your-portfolio/

It is the selling of losers that is the wealth-maximizing strategy!

Many investors will not sell anything at a loss because they don't want to give up the hope of making their money back. Meanwhile, they could be making money somewhere else.


So, do you behave in a rational manner and predominately sell losers, or are you affected by your psychology and have a tendency to sell your winners? 


This is not a recommendation to sell a stock as soon as it goes down in price - stock prices do frequently fluctuate. Instead, the disposition effect refers to hanging on to stocks that have fallen during the past six or nine months, when you really should be considering selling them. 


Don't hang on to chronic losers! Not only do you lose, but you also lose the out on opportunities to gain. If it's broke, fix it!

It is the selling of losers that is the wealth-maximizing strategy!

Ref:

Emodons Rule

Never subsidize losers with winners.

Rather than take the medicine -- the loss -- they hold on to the losers and sell their winners.
 
They never learn my rule:  Never subsidize losers with winners.


Sell the losers and wait a day. If you really want them, go buy them back the next day. I also am certain that you never will.

Eject the losers and the winners will lift the portfolio.

It is the percentage of time that most of a portfolio is invested in rising stocks that determines how good performance will be. Eject the losers and the winners will lift the portfolio.

An exception to every rule. This applies particularly to value investors with long term horizon. Instead of blindly selling the losers until all you have are winners, you should really look at whether the fundamentals have changed for the stocks. There may indeed be a good reason for the relative underperformance of Stock B – e.g. poor management or grim industry outlook. However if nothing has changed and you thought Stock B was good value when you first bought it, it must be an absolute bargain after dropping an extra 50%! Shouldn’t you be buying more instead of selling?

Investing for the long haul: Sell the losers, let the winners run.

This is the time people should review their holdings, keep the stocks with the best potential, sell the losers (not those with the depressed prices but those whose revenues and earnings aren't capable of growing adequately), and buy others with better potential while they're selling cheap.

Sell the losers, let the winners run.  But you shouldn't jump into any "hot stock" without knowing what you're doing.


Read also:
The Ultimate Hold-versus-Sell Test
http://myinvestingnotes.blogspot.com/2009/09/ultimate-test.html

Let Your Winners Run, Cut Your Losers

When you invest, it is easy to sell your successful investments and keep your failing ones. This is what comes intuitively to most investors but can end up costing you a lot of potential profits. By selling your winners too early, you could miss out on huge gains. By keeping your losers too long, you could realize many losses. This isn't always true, but it makes mathematical sense; if you keep your money in losing investments instead of winning ones, you'll more likely end up losing money.

If you have an investment that has been performing consistently well, there is no good reason to sell it. As the adage states, it is important to let your winners run. By selling too early, you could miss out on a lot more than holding onto a losing investment for too long. When holding onto a losing investment too long, you can only lose the money you initially spent. If you sell too early, you could lose many times the amount of money you initially spent. By letting your winners run, and cutting your losers, you can do much better than doing the opposite. As with all investments, it is still important to do your homework.

The difference between the buy and sell transactions is profit.

I. BUY LOW, SELL HIGH

The idea of "buy low, sell high" is as old as trading ownership of properties. It is the basis of all business. Buy a property at one price and sell it at a higher price. The difference between the buy and sell transactions is profit. To make a profit is the reason to buy and sell stock.

When the investor first heard about the takeover, it was already late in the game to make a play. Thinking for a day or two about buying or selling can sometimes be disastrous. The investor sold out the position without learning the details.

Once a strategy is put in play, an investor should not be so quick to change. The investor should have checked the background on the two companies. The 10 percent loss strategy is just that, a 10 percent loss. It has nothing to do with how a price will perform in the next few days. Some professional investors look for stocks that are down 10 to 15 percent and consider them buying opportunities. They know the 10 percent will be bailing out and the stock prices can become even better bargains. These investors will allow a 10, 15 or even 20 percent drop because the majority of buyers did not buy at the top.

If an investor is going to speculate on takeovers, it is important that he or she realize that the prices will tend to be volatile until the actual takeover occurs.

The axiom "buy low, sell high" should not be followed in reverse by the investor.


II. BUY HIGH, SELL HIGHER

Many individuals are attempting to "buy high and sell higher" when they buy a stock that is on the move. In fact, professional traders frequently use the strategy. Soaring prices are attractive to investors, who believe the prices will keep moving. As long as the momentum of the price swing attracts new buyers, the soaring stock price will continue to climb. It might run up for a couple of days, weeks or even months. Eventually, however, there is a hesitation, followed by a turn as the profit taking begins. The last buyers not only have the smallest gains from the run up, they will obviously also have the biggest losses. It is somewhat like a pyramid scheme where the losers are the last to join.

A severe market decline creates lower prices and large cash positions even though the earnings of stocks can remain unchanged. The bargains can be resisted for only a limited time. In a severe market decline, the climb back to former levels could take a few months or longer, but the recovery will come in time.

Where are the plays?

Individual investors can seek out stocks that are either in play by the institutions or are likely to come into play. Often they are stocks with strong fundamentals in earnings and revenues, found in industries with good growth potential. Medical products and devices can be exciting fast growth companies. Sometimes older products companies with strong growth records do well.

Enhancements

The strategy of buy high, sell higher can be enhanced by anticipated increases in earnings or by corporate takeover situations. Although anticipation of higher earnings creates unusually high ratios, when the earnings do increase, the ratios return to normal levels. If the earnings do not cause a return to normal levels, sellers will eventually force the return.

Takeovers

Corporate takeovers create a different situation. Professional arbitrageurs go on search missions in which they look specifically for companies likely to be bought out by some other company. The large leveraged buyout takeover can become a classic buy high, sell higher situation. For those companies who could arrange the deals, there was less risk with greater profits.

Long-term intention

Buying high and selling higher can be a visible way to make money in the stock market, but it is not without risk. The strategy usually calls for the intention of a longer term hold for example, when the earnings cannot catch up with the price or in a takeover, when the deal is finalized. Although it is possible to trade in and out during volatile times, the whip-saw effects of being on the wrong side can be devastating.

Corporate takeovers that fail to materialize are a different story. If a buyout does not occur, the stock price will probably fall to previous levels or below. Most often, investors would be prudent to sell and take the loss quickly, rather than hang on and hope for a recovery. A prudent play after selling out can be to attempt bottom fishing once the price gets hammered. Such activity should be based on the individual's belief that the stock can weather the storm and that the company is still capable of generating good earnings.

It would not be unusual for institutional or other experienced stock traders to play these stocks for small profits. They might sell short at the peaks and attempt to buy long at the lows. Such actions often end up to be momentum oriented. They watch the trades minute by minute to see if there is any strength as shown by volume. If strength is indicated by larger volume, they hold their position. If the volume declines, they close out their positions and plan their next strategy. Obviously, timing is everything in these speculative strategies.

Long or short term

Buy high, sell higher can work for either the conservative long-term or speculative short-term, strategy. But what either strategy needs is a stock that has a solid reason to go higher in price. Two of the main reasons for a stock price to go higher are anticipated higher earnings or a takeover plan.


III. SELL HIGH, BUY LOW

Sell short at a high price and buy back at a lower price. Wonderful, an investor can make money in a falling market.

Limited gain

A short position can profit only to the amount that a price drops. But in a short position, there is virtually unlimited risk because there is no limit to how high a stock price can go. Eventually, the shares must be bought back or if the investor currently owns the shares, delivered to cover the short position. The potential problem is that if the price does not fall, it might rise higher than the investor can afford to pay.


IV. SELL THE LOSERS AND LET THE WINNERS RUN

It is one of the most important understandings an investor can have about the stock market. It is prudent for an investor to sell stocks that are losing money, stocks that could continue to drop in price and value. It makes equally good sense to stay with stocks that show significant gains, as long as they remain fundamentally strong.

Any price drop is a losing situation. Price drops cost the investor money. They are a loss of profits. In some circumstances the investor should sell, but in other situations the investor should take a closer look before reaching a sell decision.

The determination of whether a stock is still a winner depends on the cause of the price correction. If a price drop occurs because of a weakness in the overall market situation or is the result of a normal daily fluctuation of the stock price, the stock can still be a winner.

If, however, the cause of the drop has long term implications, it could be time to take the loss and move on to another stock. Long term implications could be any of the following:

1 Declining sales

2 Tax difficulties

3 Legal problems

4 An emerging bear market

5 Higher interest rates

6 Negative impacts on future earnings

Any event that has a negative impact on the long term picture of earnings or earnings growth can quickly turn a stock into a loser. Many long and short term investors will sell out their positions and move on to a potential winner.


http://www.omniglot.com/info-articles/dallas/buy_market_price_sell_stock.html