2 Rapid Response Actions for Investing Incredibly Well

2 Rapid Response Actions You Can Take for Limiting Losses and Investing Well

People Jumping From Ship to Lifeboat
People Jumping From Ship to Lifeboat. Neil Webb

In most situations, those who react quickly tend to enjoy better final results.  This is true whether on a sinking ship, in a burning building, or trading stocks.  With penny stocks, or even blue chip investments, some of the best investors will sell their shares "at the first signs of smoke."

We all make mistakes, and this is especially true when trading stocks.  Many shares are volatile, unpredictable, or just plain illogical in their actions.

 The smaller the underlying companies (yes, we are talking about penny stocks), the more pronounced that volatility can become.

While we focus on speculative stock market investments, the wisdom in these words can apply to just about any type of investment (from art to wine, real estate to options).  Likewise, the concepts here can also be applied to getting a good seat on a lifeboat!

The people who "live to fight another day," are the ones who:

  • recognize that the shares are not acting like they had expected
  • cut their losses early

First of all, you should have an expectation for how an investment might act before you buy it in the first place.  Will it slowly increase in value?  Will the earnings release spike the shares? Will the big merger send the stock higher?

The instant the underlying investment isn't acting the way you had anticipated, you are in unpredictable waters.  In such a situation, you may benefit by preserving what's left of your capital (by selling), rather than going down with the ship.

Of course, this rule does not apply as much when the shares are surprising you to the upside.  If you thought you'd make 25% in the year, but the investment suddenly spikes 75% in a couple months, reassess your expectations.  

Also, pay extra special attention to the comments on letting your gains run, which we make below.

 Many investors are surprised by the heights to which smaller stocks can rise, and the majority sell too early.  Almost everyone took profits from Microsoft, Google, and Lululemon well before their shares even came close to reaching their pinnacle.

Second, always cut your losses early.  Yes, it's hard to admit a mistake (by taking a loss).  Yes, it's easy to justify hanging on, or simple to assure yourself that the shares will come back, but there are thousands of broke investors with that same philosophy.

In life, the hard choice is almost always the right one.  When you take your loss, you insulate yourself from further (often serious) downside.  You also open up the opportunity for your cash to be put to work elsewhere.

While we never give trading advice, we have seen (and lived) that the best investment results come to those who cut their losses early, and let their gains run.  In fact, limiting your downside to 5%, but catching some upside from time to time, such as shares which climb several hundred percent (which we often see in penny stocks), means that you would only need to make the "right" call one time for every 15 to 20 mistakes.

Be a rapid responder.  Cut your losses early, be concerned whenever the underlying shares are not acting as expected, and let your gain run.

 This last point is especially true, considering that with speculative investments, those gains can often run... and run... and run.