Q. Dear Julie: Five years ago, I bought a stock in a company that was thriving. Shortly after, the stock began to sink. I prefer long-term investments, so I hung on, hoping that it was just a temporary downturn. I was wrong. I am still waiting for the price to reach what I originally paid so I can sell it. Should I continue to hold onto this company? I feel as if I’m turning my back on a good friend by selling.

A. Don’t feel bad, you are not alone. No one likes to sell a losing stock. It’s the ultimate admission of having made a mistake.
I am no stranger to the sinking feeling of watching your stock drop a little each day, to the hope on the occasional days when it changes its precipitous trajectory, only to be disappointed again when it sinks even lower than before. Cutting your loses is not an easy lesson to learn, but perhaps now is a good time to consider an alternative.
You have been investing for five years, so I am certain you understand that the first rule of success in the stock market is not to risk tomorrow’s lunch money. You must be willing to do without your investment money for at least two years. But that’s only half the battle. You are the guardian of your money and knowing when a small loss can turn into a disaster is part of your duty as an investor.
Lets get over it! We are going to make mistakes. No system is going to work 100 percent of the time. But if you can get a system to work at least four out of every 10 times and you cut your losses early, you can still make money in the stock market.
Remember these five crucial points:
1. Buying right offers you the best protection against losses. If you have checked your company’s fundamentals, concentrating on its most important vital signs, wait until that company gives you the buying signal that it’s coming out of a solid base (like a cup with handle, double bottom or flat base) with high volume. Buying at the pivotal point will increase the odds of making an early profit on your stock.
2. Protect your initial investment. You did your homework, read the charts and jumped in at precisely the right time. But, instead of rewarding you with higher prices, your stock begins a downtrend of 10 percent below your purchase price: SELL! Don’t wait around second-guessing yourself trying to rationalize what has happened. Something has gone wrong and you better get out.
3. Defend your profits. Investing is like walking a tight rope between greed and fear. They say in stock market jargon: “bulls can make money, even bears can make money, but pigs never do.” If your stock takes off after you bought it and you are beginning to relish in the thought that you have discovered another Qualcomm early on, keep your eye on your stock. Once you are in black territory, start measuring your 10 percent from the top. If you bought at $20 per share, and your stock climbs to $30, your selling point should be $27 ($30 minus $3). Don’t let a nice profit dwindle down until it becomes a loss. Be willing not to sell at the absolute high point but retain your gains.
4. Be willing to be out of the game altogether. Don’t be surprised if once you’re out of your stocks by following the previous rules that you see the general market begin to deteriorate. History shows that three out of four stocks will follow the trend of the market. Don’t try to swim against the current. Wait in cash until you get confirmation that the market is in an uptrend as measured by one of the major indices. You will increase your chances of making money.
5. Use down time to prepare for the next uptrend. While you are sitting in cash, use your time to research the next market leaders by concentrating on the best sectors and industries. Stick with the leaders in these industries and wait until both the market and your company give you the signal that it’s time to play!
To further guide you, the above pointers and suggestions are included in my first book, Get Your Share, A Guide to Striking It Rich in the Stock Market.

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