Remember the most popular TV show in the March of 2001? It was the program called "Who wants to be a
millionaire". In a short year, we are now enjoying the show by the name of "Survivor". What a difference a year makes!
The same is true in the world of investment. Many investors spend most of their time deciding what stock to buy, but
spend a little if any time thinking what stocks to sell. This is a serious mistake. Like NBA basketball, defense is as
important as offense if you want to win a game. You can become a highly successful investor if you have a realistic set
of selling rules. Through simple rules, you can learn to be a good seller as well as a good buyer. In this section, I
would like to discuss the number one rule in the game of investment: how to cut your losses.
The basic rule is easier to say but much harder to implement: sell your stock if it drops 7-8% below your entry point.
That is, to cut short your losses to protect yourself against the possibility of much greater losses. Overcall, your average
loss will actually be less because in a few instances you can recognize when a stock is not acting properly before it
drops 8% below your cost. In a dynamically changing investment environment, the rule "buy and hold" won't work
very well. Take a look at the following examples in the period of 12 months: YHOO from $205 to $14, CSCO from
$86 to $15, QCOM from $200 to $50. They were the generals in the bull market. When the generals were taken out and
got shot, you know the game is over. Many investors, I hope you are not one of them, are still holding these shares and
dreaming the recovery which may not come at all.
In the real world of investment, no body can pick up winners all the time. As a matter of fact, I remember I read
somewhere that you are considered yourself a successful investor if your selection of stocks is 30% right. It is
extremely important not to let yourself trapped in a hole that gets deeper over time. Let me do a simple math for you.
Suppose that you buy 1000 shares of stock at the price of $50. Instead of selling it at $46 (the 8% rule), you decide to
hold on. Now it trades at $25, what to do? If you sell it now, next investment you make must go up 100% to get even. If
not, the stock may go to a single number, as many stocks did in the last year.
Let us assume that you begin with $10,000 and made 10 transactions ($1000 each). Seven of them were losers and 3 of
them were winners. If you follow and enforce the 8% rule religiously, you lost $560 calculated by $1000*0.08*7. All
you need, therefore, is to make 19% of the three winning transactions ($1000*0.19*3 = $570). If you enjoy the
excitement, sometimes rewarding experience, of stock trading, you must know how to preserve your capital, which is
more important, I think, than making profits. When the bull market comes back, the real winners on the Wall Street are
the survivors in the bear market because they are the only investors who have the money to make a killing. There is a
famous saying in Chinese: "A fighter is not afraid of cutting his own arm off if that is what it takes to survive". In
conclusion, let me go back to the title of this article by giving you my advice: If you want to be a millionaire, you must
learn how to be a survivor first.
