What is your philosophy of investing?
While the best principles concerning investing are probably first, to begin early and second, to invest often and regularly, selling is a whole different proposition. Will Rogers, American humorist of a century ago, wrapped up the whole process like this with a bow: Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up (sic), don’t buy it.
At this time in our history, are you not amazed at the stock market behavior? One thing about which I have been banging the drum is that political fears and change obviously do not control investment decisions. In general, your emotions provide the worst correlation in making these decisions. Time after time, history shows that when you are frightened the most, it is exactly or almost the right time to invest more.
This truth about human nature provides us with a negative correlation we can use. In general, when everyone is buying like there will never be another correction, it is time to be wary. Note I did not say to sell. Mr. Market can be irrational for much longer than you have money!
The behavior of investments – whether stocks, bonds, commodities, etc. – is permanently cyclical. Some believe in the rational market theory, that prices are always rational given the existing conditions and information. I believe prices are rational for about 15 minutes while rising and again about 15 minutes as they plummet!
Example? Tesla could be an all-time best. It truly looks as if it could rise forever. On Tuesday morning, Jan. 19, it sold at $842, up more than 117 percent since Oct. 30. Last year on March 18, it bottomed at $70.10. It is now higher by over 1,100 percent. Which price is more likely rational?
If you sold every time such a stock reached a new high, you would be sorely disappointed. I know folks, even experts, who decided that prices were too high, they sold out, and waited months or years for a correction. One finally came, but they lost huge amounts of money in opportunity cost.
Consider a trip to Pike’s Peak. What if you have GPS, a self-driving car, but can only see for 100 feet ahead? How many hilltops would you cross on your way to 14,115 feet? While investing, you can see indicators but not very far ahead. You cannot know you reach a hilltop until you begin the decline. Technical indicators help determine the likelihood of it being an intermediate top or a long-term top because they indicate what is happening behind the curtain of price.
Now let’s consider the research conclusions of Investor’s Business Daily founder William O’Neill. His study of 130 years of market history led him to observe a couple main principles. One, your first priority is to preserve your capital, your principal. Two, that you should sell even the best stocks if they decline more than 8 percent from your purchase price. If you do, especially when you can buy and sell most stocks and mutual funds without trade charges, you will live to invest another day.
There are other selling rules, but you must have at least one. One of my favorite market sayings: Pigs get fatter and hogs get slaughtered! Do not grow up to be a hog. Remain a pig and make plenty of profits for your future. Your old self will thank you.
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations)
(Statistics from Worden Brothers, Inc., TC2000, 2021.)
Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at email@example.com.