| An investor can find and research the best stock on | | | | It is advisable to make a "test buy" in a shaky or |
| the market, one with huge potential but if the | | | | unstable market which allows the investor to assess |
| general market indices are negative, it will most likely | | | | the general conditions with minimal risk but still |
| be the wrong time to buy. A stock with tremendous | | | | maintain an emotional attachment. If the position |
| accelerating earnings, rising sales, an up-trending chart | | | | goes bad, a small loss will be realize but the damages |
| pattern and a strong industry group may sound | | | | will be limited and the investor's pride and ego can be |
| excellent to buy but will mean absolutely nothing if | | | | repaired rather quickly. In a sense, the investor was |
| the market is positioned to move in the opposite | | | | half right by only initiating a partial position also known |
| direction of your expectations. As soon as a stock is | | | | as a "test buy". If the market was trending up, a |
| purchased, the time comes for an investor to make | | | | "test buy" would not have to be established as the |
| a decision to hold or to sell. If the position shows a | | | | market direction would have been clear from the |
| profit, hold as your judgment is correct. If the | | | | beginning. |
| position shows a loss, cut it quickly and don't | | | | When it comes to timing, an uneducated investor |
| rationalize the situation before it doubles in size. | | | | may realize better gains during a solid bull market |
| Timing will play an important role in determining if you | | | | based on pure luck than a seasoned investor will |
| are right or wrong. | | | | return in a sideways or unstable market. Following the |
| Losers must be cut quickly, long before they | | | | trend will be the most successful route to consistent |
| materialize into enormous financial disasters. They | | | | profits over the long haul. By watching the general |
| company and stock may not be a loser but rather | | | | market indicators, such as price, volume and daily |
| your timing may be premature to a strong | | | | new highs, an investor should know exactly what |
| movement, forcing you to sell on a pullback. After a | | | | type of environment they are trading. The most |
| stock is cut from your portfolio, the transaction must | | | | important factor weighing on the stock market is the |
| be forgotten about and eliminated from your | | | | presence of public psychology, even more so than |
| subconscious mind and/or emotional bank. The trade | | | | any fundamentals that the most intelligent academic |
| must be studied to capture the true essence of your | | | | analyst can compute. Technical analysis along with |
| mistake but the specific security involved must be | | | | confirmation of the market trend allows us to see |
| blocked from any sentimental attachments, allowing | | | | the combined thought process of the general public |
| you to consider reinstating the position at a higher | | | | and tells us if the timing is right to buy or short a |
| level. This repurchase may take place immediately or | | | | specific stock, regardless of the fundamentals. |
| well into the future but the important fact is that you | | | | In conclusion, we must understand that certain |
| were wrong with the timing on the initial position. The | | | | situations are only applicable during specific times. |
| timing, also known as the 'M' in CANSLIM by William | | | | Buying leading stocks during a down trend is a sure |
| O'Neil, may have been wrong even though all | | | | way to multiple losses that are cut quickly. Shorting |
| fundamental and technical criteria related to the | | | | stocks during a raging bull is another sure way to |
| individual stock seemed to be perfect. | | | | financial disaster and margin calls. Don't get |
| A quote from the great Gerald Loeb: | | | | discouraged if you take a few small losses |
| "Cutting losses is the one and only rule of the | | | | consecutively as this is your rules telling you to stay |
| markets that can be taught with the assurance that | | | | out of the market at this time. The timing may be |
| it is always the correct thing to do." | | | | off even though the stock and research is favorable. |
| The wisdom shared by Loeb is easier said than done. | | | | Why would you swim upstream to reach your |
| Humans like to take profits and hate taking losses or | | | | destination if you could jump in a boat and row |
| admitting that they were wrong. Pride and ego | | | | downstream with the current another day? Before |
| distorts the clear thinking process that every investor | | | | you ever start to immerse yourself into researching a |
| must posses when following clear cut rules that | | | | stock to purchase, make sure you know the exact |
| provides insurance to their cash stake. Even tougher, | | | | environment of the market and determine if it |
| humans refuse to repurchase anything at a higher | | | | coincides with your objective. If it doesn't, get ready |
| price that they sold it previously. As Loeb states, | | | | to get slaughtered, especially if you don't follow strict |
| only logic, reason, information and experience can be | | | | rules to cut all losses quickly. |
| listened to if failure is to be avoided. | | | | |