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At least for the stock market, happy times are here again. After losing 54 per cent of its value during the recent downtum, the market is way up. This is where it gets tricky. There is probably more money left on the table in rising markets than is lost in the worst downtums. Here we some strategies to avoid that fate: 1) When deploying new money, focus on value. The higher the market goes, the more risky growth stocks become. What you’re looking for now is the company that’stuming around or the great storythe market hasn't noticed yet. 2) With the stocks you already ovm, employ a checklist to determine what to do. Let us take two examples: You have a stock that’s up 50% md one that’s down 20% You might decide to sell the loser iust because it’s lost money. Altematively, you might take your pro?ts on the winner aid keep the loser in hopesit will recover. Both strategies are illogical. You can’t decide what to do without looking at the company itself, and trying to decide where it goes from here. Here's the drill: —Recheck the story. When you bought your stock, you should have asked yourself what the company does, why economic conditions and market forces favor it, and why it's likely to beat its competition. The story is important, not only because it gives you a rationale for your investment, but because other investors focus on the story. in fact, sometimes that’s ALL theyfocus on, which is one reason stock prices sometimes exceed all rational measures of value. Nowyou wmt to know whether the story still holds Whether your stock has gone up or down, what doesthe story look like going forward? A dropping price may simply mean a stock the market hasn't noticed yet, or it may mean your story was vvrong—or premature. —Look at the basic numbers. A gain of 50% is great, but if your stock now sports a P/E of 60, remind yourself that it would take the company 60 years, at its current eamings rate, to eam back its share price. That’s generally a very risky bet, although fast growers can sustain much higher P/E ratiosthan slow ones. On the other hand, lfthe company still looks incredibly cheap, you’d be a fool to sell lust because you have a 50% gain. The best companies can sometimes retum 10 or 20 times the investors money over a period of several years. If you pass up that money, you won't be happy. The thing to ask yourself is whether you’re holding out ofa calm, rational assessment of the company's value or if greed is you motivator. If it's the latter, it's time to get out. The same principles apply to the loser. For the sell decision, It should make no difference whether you’ve lost or make money on the stock. All that matters is what you believe the stod< will do next week or next month. -Don’t forget trading costs and capital gains. Selling a stodc iust because it's a little pricey is usually a mistake. The tax and trading costs will wipe out your galns. M oreover, if you're wrong about the stodc you buy to replace it, you’ll do much worse. Generally, you should sell a winner only if its price has gotten way out of proportion to its value or ifyou expect the company to do poorly going forward. Your loser may be a better value than ever if its price is now much lower than its value. Sooner or later the market will notice and the price will rise. Sell a loser because its future prospects are dim, not because you’ve lost money. Don't hesitate to sell if you think you were wrong about the company's prospects, though. The loss will help to offset your gains and reduce your tax bill. Even the best investors are wrong a signi?cant percentage ofthe time, so don’t let ego keep you from ditching a bad trade. —Be more concemed with ?nancial soundness than usual. As prices rise, stocks with too much debt or poor cash ?ow should get special attention. In a rising economy, they may continue to improve, but watch out for a sudden downtum. visit: www.moneybanao.com for Commodity Trading Tips
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