The Best Indicator of What’s Happening With a Stock
The single best indicator of what’s happening with the stock is the price. You can sleuth stuff all you want, but, when the price is falling, there’s a reason.
And typically, if you don’t know, you’re better off getting out and waiting until you do know. And so that’s why I use trailing stops for everything.
It’s the single most reliable indicator of what’s going on in a stock and a sector: the price.
If the price is going up, and you don’t know why, that’s good!
Let it go.
Oftentimes, you’ll find out two, three, four months later, why that stock was going up. And same thing with sectors. Sometimes sectors weaken, and you keep looking at your stock thinking, “Jeez, there’s nothing wrong with my stock. Why is the stock price falling?”
So, that’s why we use trailing stops, and that’s why we use them to trim our garden, so to speak. If we think about our portfolio as a garden, when a stock’s falling, our initial reaction to it is to hold on. “It’ll come back. It will. I don’t want to sell it now! If I sell it now, I’ve lost money.”
But the fact of the matter is if you hang on to all your stocks that are falling in the hopes that they’re going to come back, and you sell your stocks that have gone up because, well, heck, you made money there, you wind up with a garden full of weeds.
Because you cut all your flowers, but you let all your weeds grow.
So we don’t want to do that. That’s why the stops are so, so, so vitally important to the efficacy of our portfolio.
I know that some you are still struggling with this. And I have to tell you that there are lots of investors who struggle with this. I will also tell you that the investors who use stops will outperform the ones who don’t.
How do I know that? Well, in my previous company, I used stops, and a lot of my peers kind of did, or didn’t, and I outperformed them. Period.
Because I’m not emotional about it. There’s no ego. There’s no fear. We put our stops in place, and when the numbers say it’s time to sell, we sell. What that does is it allows us to be very, very right on the upside, and not be very, very wrong on the downside.
And if you can just do that — just do that — small losses and big gains — you’ll make money. You’ll make money anywhere. If you apply that to all of your investments, you’ll make money. That simple thing. Let the numbers tell you what to do.
Keep your losses small, and let your winners run.
You will be absolutely shocked at how much better an investor you will become.