Don’t fall in love with a stock

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This comes from the “Old Advice That Probably Is True File”. It’s easy to become enamored of a stock’s “story”, especially if it’s a compelling one. You can easily inflate the company’s capabilities, at least in your own mind. Because there’s one big problem when it comes to thinking a company and a stock are the same and they’re invincible. In the stock market, anything can happen, and usually does.

Even a company that’s doing a great job doesn’t always get the top valuation the managers expect. Despite the best efforts of all involved, the stock price might languish for a variety of reasons. Holding on to the stock just because you’re “sure” the company is doing well is not enough of a reason.

You have to examine the big picture when it comes to stock, not just the pleasurable parts. And if other people don’t agree with your valuation of a stock, that’s okay, as long as you have a ton of patience. If not, you’re forced to hang on with nothing but belief. And belief almost always turns to terror when the bottom falls out.

Either way you look at it, stop-losses are the only safe way to hold most stocks. Most people know it, but not everyone thinks it’s a key to success. If you’re in love with a stock, make sure to set an extra tight stop.

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