There are two traps that I have fallen into in the past and refuse to do it again. The first is becoming seduced by a statement such as the following: if you had invested $10,000 in XYZ Company X years ago it would be worth $500,000 today. The second is XYZ Company dominates its industry. There is no reason why it will not continue to dominate, so I am going to buy it and hold it for the long run. Then in X years I can sell it and live happily ever after. I call these traps, because they entice one to adopt a buy and hold or sail boat (if it hits I will be able to sail off into the sunset) mentality. This mentality has cost me more money than I care to admit.
Both scenarios seem logical, but logic and Wall Street don’t always go hand in hand. In the late 90s I had stocks that increased 10, 15, and as much as 20 times. Go back and look at a chart of CMGI (I started purchasing it in 1998). In 2000, I was hoping for a 20% return on my account – this should have been a piece of cake based on the previous couple of years. The plan was to then sell in January 2001. That way I wouldn’t have to worry about taxes until 2002. Well, this wacked-out strategy forced me to work harder on my 9 to 5 as the market imploded in 2000.
The bottom line is that market could care less about my sail-boat strategy. It is going to do what it is going to do and we must react. Whenever, I enter a trade now I have a price in mind where if it is breached I will close the trade. No more of this pie-in-the-sky stuff for me.