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Published: November 29, 2010
My friend Elwood is as smart as anyone, anywhere.
I met Elwood when I moved to the Northeast Florida coast a
decade ago. Elwood broke the hillbilly stereotype. I learned a
Southern accent doesn't mean you're uneducated (just like a New
York accent doesn't necessarily mean you're pushy and abrasive).
When Elwood talks, I listen. Elwood stopped by my office the
other day. It turns out, he just had his first "ten-bagger"... a
stock he owned that went up tenfold. I asked him to tell me the
story.
Steve, I'd been readin' your stuff. And I wanted to buy some
silver to add to my gold. This was about two years ago. I
decided on Silver Wheaton. I bought at $3.40 a share.
I did like you say to do... Once I was up by 100% on Silver
Wheaton, I sold half. That way, I was playin' with the house's
money. From there I let it ride, like you say.
Well, I've been ridin' it. And it's now up to $34 a share. I'm
up tenfold. And based on your most recent write-up of Silver
Wheaton, I'll keep ridin' it.
Elwood did it exactly right...
Look, the simple fact is, you'll never have a tenfold winner if
you sell early. You have to let your winners ride.
The flip side is true as well... Never let a small loss turn
into a big one.
This table tells the story. Let's say your investment loses 10%
or 20%... or even 90% (in the left column). In the right column
is how much your investment has to rise to get back to where it
started...
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If a stock is down 10%, it only has to recover 11% to get
back to where it started. But if it's fallen 50%, it has to
recover by 100% just to break even. Chances are downright
terrible that will happen.
If you simply follow these two rules – let your winners ride and
never let a small loss turn into a big one – you should make a
fortune in your investments.
The trouble is, most people can't follow these rules. As soon as
they see a little profit, they sell. But when they're in the
red, they "hold and hope." That's doing exactly the opposite of
these two rules.
You never want to put yourself in the position of having to hope
a big loser doubles just to break even. You want to be like
Elwood... cutting losers and riding winning positions as long as
you can. That's how you make tenfold gains.
Good investing,
--Steve Sjuggerud
Editor
Daily Wealth
Note: This article originally appeared on
Daily Wealth |
