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INM July '07 - Burnin' Down The House
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net
Through almost 20 years in the business I have seen some pretty amazing things, and in this INM column I have shared some fascinating examples. True stories help get the point across far better than any fictional parables one might create. Here is a story that is literally hot off the press!
In the book, “How to Make Money in Stocks” you should notice a comparison to the 7% sell rule and fire insurance. O’Neil suggests that we should consider the act of taking small losses akin to paying for fire insurance. You probably don’t get upset and say, “Darn it! My house didn’t burn down.” And you don’t get upset and feel as though you wasted your money paying those fire insurance premiums. You paid for the fire insurance, not because you knew the house would burn down, but because you didn’t want to risk being unprotected from a potentially tragic loss.
What clinched my revisiting the “burning down the house” example was a real life experience in the past week. That, along with my catching a glimpse of a television segment mentioning Suzanne Summers’ mansion which burned down some time ago. I noticed the clip between ongoing coverage of the “war on terror”, an eerie example of how we each are inclined to study and relate to other situations wherever we can make a special bond. Summers said to imagine you left your house this morning with whatever you took with you, and everything else you left behind is gone. That really struck home with me.
In the past week there was a big scare at my place. I knew something was wrong when I walked in the door last Friday evening at 7:30pm and I could see and smell smoke. The problem was avoidable. Unnecessary risks were taken. The situation could have been handled more wisely. Of course, the same usually can be said for stocks that get into bigger trouble.
Thankfully, while they were making sure my attic was finished smoldering, the Boca Raton Fire Department told me, “You were very lucky.” They determined that the not-so-near-inferno was caused by careless roofers who were supposedly “upgrading” the place. From my experience, this parallels how upgrades are quite often as difficult to appreciate when it comes to software (but I will spare you any rants I might go into on that subject). Just remember that you can prevent devastating losses and you can avoid having stocks you own burn all the way down to ashes. Selling a misbehaving stock and taking a small loss at 7-8% is the only way to prevent greater devastation that could harm you financially and emotionally. You can control your “luck” in a sense, greatly reducing the odds of a huge loss by simply following the most basic sell rule of them all.
If a stock you own falls 5-6% from you purchase price, it is time to have your fire extinguisher ready and be getting prepared to follow your escape plan. It may not always seem as critical to have a sell discipline that will limit your losses, but you should treat any failing stock just as if it is a potentially deadly blaze that could literally take the whole house down.
I told a couple of people that I was surprised the smoke detector was not going off when I first discovered there was a problem. Someone suggested that maybe its battery was dead. I dismissed that concern because I know the smoke detector in question is hard wired. But, I later discovered that the smoke detector had not functioned because of a faulty power connection. Thankfully, it didn’t take a genius or any high-tech gadget to recognize that there was trouble at hand.
Most problems in the investment world can be spotted, and serious problems (losses) prevented. Usually you should be able to notice when a stock you own is triggering technical sell signals. If you are managing your own buys and sells, you should have alarms set to go off whenever it looks like there is a “fire”. However, some of the frustrated readers we hear from are known to share stories of more substantial losses. As a result, I believe the full service approach we employ at our Source Capital office could be a great help to many of you who are struggling to achieve better results. Get in touch if you would like to discuss how we can work more closely with you at maximizing your investment returns and minimizing losses.
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net :
Kenneth J. Gruneisen has successfully completed the CAN SLIM® Certification Program. Mr. Gruneisen became a Registered Representative in 1987 and his career includes experience offering personalized assistance to investors with more than a decade of experience as a Registered Principal managing a branch office.
The recommendations made by CAN SLIM® certified individuals are their own and may not be attributed to the CAN SLIM® Certification Program, William O'Neil & Co., Investor's Business Daily or their affiliates. The CAN SLIM® Certification indicates only that the individual has successfully completed the CAN SLIM® Certification Program. CAN SLIM®, William O'Neil & Co., Investor's Business Daily and any of their affiliates are in no way responsible for any loss or damage caused as a result of the services provided by these individuals.