Capital Preservation is Half the Battle

I think one important lesson you learn the longer you are in the market is the importance of capital preservation. In your early years you are all gung ho, and have a tendency to hang onto losers, with the hope that your original analysis was correct and eventually the market will smarten up and see "your side". But as you spend years in the market you tend to see this is, in general (not always), a losing proposition. Besides sitting in a stock with potential to keep falling you also run into 'opportunity cost' - the inability to use that capital for other ideas that ARE working. I think all new(er) investors think stock picking is all about finding winners; but since no one picks winners all the time - I think half the battle is cutting losers quickly and moving on - essentially preserving capital. After living through 98-01, this is something you remember each day you log into your trading account.

This is where technical analysis (even the most basic) can help you. Last Wednesday I sold 6 positions, 4 of which were not "working" due to technical reasons. Looking at the biggest losers in my watch lists 2 of them are among the names I sold last Wednesday, Western Refining (WNR) and Under Armour (UA) - another was Sandisk (SNDK) which is bouncing today due to Intel (INTC) but has stunk the past week. So let's see how these 4 sales 1 week ago 'preserved' capital. For a review of why I sold these 4 positions click here:

1. Western Refining (WNR) was sold around $40 as it was breaking below the 200 day moving average - I basically sold at the worst time of the day as the stock actually was as high as $42 that day. Today as crude continues to spike, and its margins get compressed the stock is down to near $36. From my sell point a 10% loss, from the highs of that day, nearly 15%
2. Under Armour (UA) was sold as it broke below the 50 day moving average earlier, but had not rebounded back over that level - I sold in the mid $60s; the stock actually spiked to $62 the next day so it looked like a bad decision. Today the stock has broken down to the mid $56 range, or 7% down from where I sold it and 9% down from where it peaked last Thursday
3. I was actually 'late' in my sale of Sandisk (SNDK); the stock had broken its 50 day moving average a week earlier and was as high as $53 the day before I sold as I was mulling selling; but I wanted to think the fundamentals for flash memory should push this stock back up... but I obeyed the technicals in this case. I sold a day 'late' at $51, the stock is rebounding today in the $48s, but bottomed yesterday at $47 as it hit a new support level, the 200 day moving average. $51 -> $47 is a drop of 8%. If I had sold at $53 either the day before or a week earlier when I "should" of technically pulled the trigger that would of saved 11%. If one believed in the name you could buy back at $47 which was a more firm support level (200 day vs 50 day)
   
4. Homex (HMX) was different from the other 3 in that it had not just broken a support level but was instead 'stuck' in a very narrow range between its 50 and 200 day moving averages. I sold in mid $56s and its now upper $56s. Again 'opportunity cost of money' - that money can be better served working elsewhere until Homex delivers a more clear trajectory technically of where it wants to go.

So once again, nothing is fool proof - but with the market weakening this was a decent slew of sales and saved some downside in the fund.

Now what I need improvement on is "letting winners" run, and knowing when to sell winners - generally with stocks making new highs there is no easy way to determine sell points, especially using technical analysis. It's more "finger in the wind" wondering how high the herd of lemmings will take the stock. I still like to 'lock in gains', when many times a stock is only halfway or three quarters into a longer term run. Sometimes you need to revert to basic physics in the stock market, and borrowing from Newton "an object in motion, will continue in motion". Until it doesn't.