“Sell earn and cry” investment strategy for desperate proletarians. May 9, 2006Posted by deminvest in Blogroll, dictionary for democratic investors, investment, investment strategies, Social investing.
"Sell earn and cry" investment strategy is not something I invented. It is something I read about somewhere, which is unfortunately very good for desperate proletarian investors and true even for affluent big investors.
Now, to understand better, let's imagine one of us proletarians of the third millennium who invested $1000 and made the stock pick of his/her life: he or she sees the stock price skyrocket so fast that it doubles in 2 months. What luck! But…
That single lucky person should be a happy person… But there is a little tricky cloud in the blue sky of his happiness… It is: "what do I do now?" or better… To be Shakespearian "To sell or not to sell, this is the question".
1) Maybe he will hold on the stock, hoping it will continue to go up. So many people behaved so with Internet Stock a few years ago…
They did hold on so long… that the infamous bubble had time to burst and the stock which our unhappy friend bought fell so rapidly 90% that he lost 900 of his hardly earned bucks. This way we have and unhappy and poorer investor.
2) Maybe she will decide to sell the stock at the double of its price. He/she will cash in $2000, $1000 more than he had spent, but our friend had chosen Google at the day of its IPO. Google at its IPO cost 85$, our friend decided to sell as soon as it doubled, at $170. Good for her, she sold at double of the price! She got her $1000 back and also $1000 of gain… BUT… what happens next… Google goes up another 100% and then more and more. Now Google is up over 400%… over $400, so I bet our imaginary friend has cried a lot. She could have sold at more than four times the original value! She imagines that she has lost thousands of dollars by selling too early.
As usual both our proletarians are crying, with one interesting difference:
1) is crying because he lost money
2) Is crying even though she has doubled her money.
Investor 2) has done what I call "Sell, earn and cry"; she is crying but she is a bit richer… Much better than investor 1) crying and also poorer!
Now I will explain why 2) is right and actually the good way to invest. It is very simple: nobody can sell at the highest price. Choosing a stock that will go up is hard, but you "only" have to guess whether it will go up, down or will not move. On a stock that is going up it is almost impossible to guess the exact day in which it will stop going up… And even if you do guess the day, to sell at the maximum, you also have to guess the exact hour, minute and second of the highest price. Impossible!
A good deal on stock market is real only when it makes you earn money, and to earn money you must sell. So nearly everyone who does a good investment and makes it real by selling and getting the money back in his/her pocket, will afterwards cry, because the stock will go further up. If you don't sell the stock, you don't have the money and you cannot be sure to have done a good deal, because maybe tomorrow morning your stock will tumble.
The "sell earn and cry" rule is general, but there are a few exceptions:
1) Dividends. If the stock you bought goes up, but still continues to deliver a good dividend yield, you may want to keep it, because the real money into your pocket will come from dividends.
2) To "cry" a little bit less you may keep part of the stock you bought. To cry a little bit less I usually don't sell all the stock that went up, so I get my money back, but my tears are less bitter because as the stock continues going up, I loose most of the possible gain, but I still enjoy a little bit of satisfaction 🙂