The Red Dress Story
The stock market is really no different from your own business.
Investing is a business and should be operated just like a business.
Assume you own a small retail women's clothing store. You have bought and stocked women's dresses in three colors—yellow, green, and red. The red dresses are quickly sold out, the green ones are half sold, and the yellow ones have not sold at all. What do you do about it?
Do you go to your buyer and say, "The red dresses are all sold out. The yellow ones don't seem to have any demand, but I still think they're good and besides, yellow is my favorite color, so let's buy some more of them anyway"?
Certainly not!
The clever merchandiser who survives in the retail business eyes this predicament objectively and says, "We sure made a mistake. We'd better eliminate the yellow dresses. Mark them down 10%. Let's have a sale. If they don't sell at that price, mark them down 20%. Get our money out of those 'old dogs,' and put it in more of the hot-moving red dresses that are in demand." This is common sense in a retail business. Do you
do this with your investments? Why not?
Everyone will make buying errors. The buyers for department stores are professional buyers and even they make mistakes. When you do slip up, as soon as you recognize it, sell and go on to the next thing. You do not have to be correct on all your investment decisions to make a net profit.
Anytime a commitment in a security is made, you should define the potential profit and the possible loss. This is only logical: you would not buy a stock if there were a potential profit of 20% and a potential loss of 80%, would you? But how do you know this is not the situation when you buy a stock if you do not attempt to define these factors and operate according to well-thought-out selling rules? Do you have any specific selling rules, or are you flying blindly?
I suggest you consider writing down the price at which you expect to sell if you have a loss, as well as the expected profit potential of all the securities you purchase. By writing it down, you will focus your attention later on the fact that the stock has reached one of these levels.
Note: Copy from Some books
