Rethinking Direction

Copyright (C) 2001, Albert W. Thomas All rights reserved.

It is finally catching up with them. The brokerage companies I mean.

For years they have been feeding bad food to their flock and now the flock is rebelling. The customer has been low man on the totem pole for too long. That food has been the disinformation that has caused customers to lose large sums of money.

What happened to the in-depth analysis of the brokerage company geniuses when these same stocks started down. I know - Hold. They call it Buy and Hold, but I call it Buy and Prey. In 2000 over 1,000 stocks on the Nasdaq lost more than 90% of their value and today many of those companies have gone under. Why were you not notified and told to sell? Because the brokerage companies were making more money doing Initial Public Offerings (IPO) than they were making commissions on your trading.

To say the naughty word “Sell” would have made company executives mad and they would not have given the brokerage company a shot at their next Initial Public Offering (IPO). To heck with the customer; he doesn’t count. There are cases where analysts were fired because they told clients to sell out.

Now that the lucrative IPO market has dried up maybe the brokerage companies will begin to realize they have a fiduciary responsibility to their customers. Hundreds of thousands of customers’ accounts have lost 40%, 50% and more of their equity. If the shortsighted brokers had protected these accounts they would have hundreds of millions of extra dollars left so the customer could trade again which would mean millions more in commissions for the house. Now the dollar cost averaging technique is left with no dollars to invest.

Customers are afraid to put more money in the stock market because they have been so badly abused. They know something is wrong, but they don’t know what so they wisely hold onto their money and refuse to pour more into losing propositions. Brokers want the customers to buy stocks and not put their dollars into a money market account where they make no commission.

The golden goose has lost quite a few pounds, but let’s hope the brokerage companies have learned that by treating customers with respect and feeding them properly will bring them greater rewards.

In either case don’t panic. You can get out of that one way street by carefully backing out. Recouping your stock market losses also means you must back out. Many people lost 50% of their investment in the last year because they were going the wrong way and could not back out.

You must admit you are doing it wrong and stop immediately just as you did in your car. In a car you have been taught there is a reverse gear so you know how to get out of this bad situation. No one has ever taught you how to extricate yourself from a losing position in the stock market - certainly not your broker and most financial planners don’t know either.

Let’s look first at how you got here. You bought stocks or mutual funds without an exit plan. I’ll put it away “for the long haul” and won’t worry about it. The nicest thing I can say about that type of investing is “STUPID”. You have an exit plan for the one way street; now you need an exit plan for your remaining money. It is the same. Back out. You have to acknowledge you are doing it wrong. Hiding from this mistake means you will continue to lose money. Do you want to do that or would you rather find a solution to not losing money again?

O.K., you have looked in the mirror and you say I am ready. Look at that brokerage statement and sell every loser you have. Every one! This takes emotional courage. Do it. Now you have cash. Don’t do anything until you have a plan and that plan has an absolute, set-in-concrete foundation: never buy any stock or mutual fund unless I limit my risk from the day I purchase it. One of the best rules is a 10% Good Until Cancelled Stop-Loss Order. Brokers hate these because it means they will have to check your account daily. Don’t believe him when he says, “Don’t worry, I will watch your account”. He won’t. It is not his money.

Using this very simple technique you will never lose large sums of money. Also as your stock moves up you raise (never lower) the stop-loss order each week following it 10% under each Friday’s closing price until you are eventually taken out of the position with a profit or, at worst, a small loss. The stock itself will tell you when to sell when it turns weak.

You have been driving for a lot of years and have gotten out of some tight places. Now you know how to not lose money in the stock market. Back out. Do it today. Put in your stops.