How You Really Make Money Investing

The Investment U E-Letter
Thursday, November 4, 2004

How You Really Make Money Investing
By Dr. Steve Sjuggerud
President, Investment U

“It doesn’t matter how many times you are right or wrong, but rather how big your winners are.” My friend Mike, in conversation

I don’t think I remind you of this often enough but this is what matters.

I’ve seen it all Through my career I’ve run my own hedge fund, run the activities of a mutual fund, headed up research departments, earned a Ph.D., and been a broker with hundreds of customers. Trust me, I’ve seen people try everything.

The way people end up getting rich off of their investments is having a few major winners.

These are the people that didn’t sell Microsoft when it showed a 25% profit, but instead held on for years – and thousands of percent gains. They didn’t sell Intel when they were up 15%, or Dell, or you name it.

It may have been luck. Or it may have been that these people knew that the key to success was having a few big winners among an otherwise ho-hum portfolio.

Of course, the trick is, you can’t lose all your money on the way to your big winners. You’ve got to trim the weeds, take out the garbage, whatever you want to call it. You never let small losses become big losses.

Go Ahead and Be Wrong – But Limit Your Losses

I recommend that people don’t ever let themselves lose more than 25% on an investment. Get out, no ifs, ands or buts. (I actually recommend a 25% trailing stop, too, meaning if you buy a stock at $10, and it goes to $20, you’d have to sell if it fell to $15, without a doubt.)

By doing this, you can be wrong as often as the world’s best investors – I’ve found that great investors are often only right about 35% of the time They lose money on two out of three investments. So why are they considered great? Their total returns are enormous because the size of the winners far outpaces the size of their losers.

Don’t worry about taking a loss sometimes. The goal is not to get every one right. The goal is the overall return.

Thanks to my friend Mike for the good reminder that basically, “It doesn’t matter how many times you are right or wrong, but rather how big your winners are.”

Don’t forget it.

Today’s IU Cribsheet

• To read more about trailing stops, and other techniques to limit your losses, check out IU E-Letter #340 – Why Size Matters to All Investing Greats.
• I’d also like to tell you about the Oxford Club Argentina Tour with Alexander Green, January 15-22, 2005 (with special guests Special Guests Horacio Marquez and Michael Checkan). Not only will you stay in the country’s finest hotels and dine in the most exclusive restaurants, you’ll also be guided and escorted at all times by the top businessmen in the country. You’ll be welcomed in private homes You’ll tour giant ranch estates And you’ll be shown the best of what the country has to offer, from the vantage point of an investor (There’s also an optional extended trip to Punta Del Este, Uruguay, through January 26.) For more information on joining this tour, please contact Agora Travel at 800.926.6575 or 561.243.2572.

Good investing,

Steve

P.S. I DID NOT MAKE AN ELECTION PREDICTION. I wrote two e-mails (”Bush Will Win It” and “Kerry Wins It?”) with headlines admittedly written to get your juices flowing (a good headline gets you to read the letter, of course).

The actual message of the last e-mail was this: The election result doesn’t necessarily matter to the financial markets in the short term stocks will rally. For example, one message of the “Bush Will Win It” e-mail was that if REAL MONEY was on BUSH (in the form of election futures) on the night before the election, then chances were strong that Bush would win.

My two election-related predictions were that 1) the market would rally whoever won and 2) that Bush would win if he “won” the futures vote, which he did. Both of these happened.

Strange then You can’t imagine the hate mail directed at me from those emails – just pure venom. The barrage of nasty emails was evenly split – Republicans calling me names thinking I was a Kerry supporter, and Democrats doing the same, thinking I was a Bush supporter. I guess I achieved my goal of trying to write an article that DID NOT pick sides – since hundreds of readers from BOTH PARTIES called me names that I can’t print here, over, and over, and over again

Look, my beat is investing, not politics. The goal here is to make money, regardless of who is in power. Let’s get back to that

Back to Archive