The Alchemist: I Love to Lose Money

Posted in Money Matters on February 10, 2003

The following is this week’s installment of The Alchemist, a column by Mensan Al Thomas, author of If It Doesn’t Go Up, Don’t Buy It. Click ‘Read More’ below for this week’s article, “I Love to Lose Money.”

The Alchemist: I Love to Lose Money

by Al Thomas


Well, not really. What I mean is I don’t mind losing a small
amount when I have to sell a stock or mutual fund that is going down or
taking away the profit I have made. During this past 3 years I have made
money each year because I was not afraid to sell. The great secret that Wall
Street does not want investors to know is all about selling, not buying.


The recent headlines scream”10 Stocks To Buy Now”, “100 Best
Mutual Funds For 2003”, “Make 25% With These Safe Stocks” and “Now Is The
Time To Buy”. All are either stupidity or wishful thinking. Brokers and
financial planners don’t want you to find out that they don’t know either so
they come up with great stories about the equities they recommend.
Unfortunately, when the stock or fund heads down it becomes one of those buy
and hold situations and they tell you that you are “in for the long haul”
and “the market always comes back”. I hope that by now you have learned this
is not true.


When there is a secular bear market, as I believe we are in now,
it could be many years before we get back to “even”. Last year 96% of all
stock equity mutual funds lost money and the average fund lost 21%. These
are times when the only safe place for money is in cash – a money market
account. For the previous 3 years money in your mattress outperformed the
stock market by 40% and for lots of folks much more. Here is one your broker
will not tell you – Cash Is A Position.


The first thing you must learn about investing is how to protect
yourself from losses. I mean big losses. When I was a floor trader on the
exchange I lost on about 40% of my trades, but I never lost much. I came to
love those little losses because I still had almost all my money available
to find a better position. One that would make money.


Almost all of the magazine writers, talking heads and brokerage
analysts are professional losers. It is easy to prove because they never
tell you where to sell what they are telling you to buy. If you don’t go in
with a plan to protect your money it is like a general who goes into battle
with no plan for retreat should he find he couldn’t win the battle. One of
the simplest money savers is the 10% stop. It you buy a stock or no-load
mutual fund you should not take more than a 10% loss. This will leave you
with 90% of your money that could find a real winner. The small losses will
never break you. It is sitting with a loss that gets bigger and bigger and
bigger is the one that will ruin you.


Learning to love the little losses will make you rich.


Copyright Albert W. Thomas. All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” www.mutualfundmagic.com. Comments to al@mutualfundmagic.com.