How To Sell Stocks: When To Cut Losses | Summary and Q&A

TL;DR

To protect your investments, always sell a stock if it drops 7% or more below your purchase price.

Key Insights

• ☄️ The stock market offers great wealth creation opportunities but comes with inherent risks.
• 🍉 Protecting your existing capital is crucial for long-term success.
• 🌸 The 7% sell rule helps limit losses and preserve investment value.
• 🤪 Pride and ego can lead investors to hold onto declining stocks, hoping they will bounce back.
• 🛟 Sanderson Farms serves as a cautionary example of the risks associated with not adhering to the 7% sell rule.
• 🥹 Holding onto declining stocks can result in deeper losses that are challenging to recover from.
• 👻 Cutting losses quickly allows investors to focus on capturing future profits instead of hoping for a rebound.

Transcript

the stock market is arguably the greatest wealth creation tool ever invented but there are risks so rule number one for making money in the stock market is to protect the money that you already have and the best way to do that is to never let a small loss become a big one our cardinal rule is to always sell if the stock drops seven percent or more ... Read More

Questions & Answers

Q: Why is protecting the money you already have important in the stock market?

Protecting your capital is crucial because holding onto declining stocks can lead to significant losses and make it difficult to recover and reach breakeven. By selling, you preserve your investment's value and can focus on future profitable opportunities.

Q: What triggers the 7% sell rule?

The 7% sell rule is triggered when a stock falls 7% or more below the price you paid for it. This price-based rule helps you avoid holding onto stocks that show weakness, indicating potential issues with the company or the market as a whole.

Q: What happens if you don't adhere to the 7% sell rule?

If you don't sell when a stock drops 7% or more, you risk experiencing even larger declines. The example of Sanderson Farms demonstrates how holding onto a declining stock can result in a 42% loss instead of a manageable 8% loss.

Q: Can the cause of the stock's decline impact the decision to sell?

No, the cause of the decline is irrelevant when implementing the 7% sell rule. The focus should be on protecting your capital rather than analyzing the specific reason behind the decline. You can investigate the cause later, if necessary.

Summary & Key Takeaways

• The stock market is a powerful wealth creation tool, but it comes with risks.

• Rule #1 for making money in the stock market is to protect your existing capital.

• Implementing the 7% sell rule helps cut losses and prevents deeper declines.