Originally Posted by frickfrock999
But if you do that, doesn't that mean you'll rarely sell off your stocks? How are you going to make any money if you're holding on to them for so long?
It's true that if you're making 2x, 3x, 4x your money you should probably look at taking out most
of your investment because these successes are very hard to achieve. But if you always cap yourself at a profit of 10% then you'll never achieve a 30%, 50%, 100%, or 200% gain on a high-flying growth stock. Long-term investing is a good thing because you're paying less in commissions and you can hold-off paying tax in most countries while staying invested.
I can't find it right now, but there's a chart out there comparing long-term to short-term investing where essentially both parties make around the same gains over the same period (assume 100% and 2-years) but a very high % of the profits for a short-term trader go straight to commissions. So after you subtract commissions the short-term trader is left with a 10% gain while the long-term trader is left with 90% gain. This is only a guideline to show you that high-frequency trading really eats into those profits and you're not really doing anything to improve your performance; you're just moving things around.
How are we going to make money if we're holding on to them? Because we're holding on to winners and cutting losers. Someone that owned Apple at $210 should have been selling in stages, some at 400, 550 and a majority of their investment between $630-700. This locks in part of the profit, while also letting it ride for even more. Had they sold at $240 they would be kicking themselves for not holding on. Losing money may hurt the most, but missing out on a huge gain hurts too.
Just as you should not cap your gains, you should
cap your losses. Setting a stop-loss at 10% or 5% is a viable strategy for buy-side investing, in my opinion. If someone bought Apple at 650 and it goes all the way down to 600 they should first examine why, then look at cutting their loss before it drops even further.
There are many factors in play here and I just want to point out that you should not rely on only 1 metric. Every situation is different and each calls for a different decision. We have to look at how the broader market is doing, we have to look at how the sector is doing, we have to look for cyclical patterns, look at where growth is, examine why a stock is dropping, what sort of fear or confidence is in the market, technical analysis, spotting a correction vs. a dead-cat bounce etc.Edited by SkillzKillz - 10/21/13 at 10:55am