Sell The Losers and Let The Winners Run

In stock market, cut your losses and let your profits run is the most important concept 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.

But just what is a loser? Is it any price drop from the high? Is a stock a loser only if the investor is actually in a loss position? 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 the cause of a price drop appears to be a weakness in the overall market situation or is the result of a “normal” daily fluctuation of the stock price, it can still be a winner.

If the cause 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:

• Declining sales
• Tax difficulties
• Legal problems
• An emerging bear market
• Higher interest rates
• 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.

parts of this article are extracted from Michael D. Sheimo's Stock Market Rules, 1999.