Investor's Corner: Always Cut Losses Short -- No Exceptions

Alan R. Elliott
You can't hear it often enough: Sell any stock that drops 7% to 8% below your purchase price -- no ifs, ands, or buts.

It's tempting to believe that a stock, particularly one with strong fundamentals, will recover. Sometimes they do; sometimes they don't. But the rule book says sell.

Stocks that fall tend to keep falling. It only takes a 9% gain to recover from an 8% loss. But if you let the stock fall further, it could crush your portfolio, and your confidence. After all, you'd need to double your money just to get back to square one on a 50% loser.

On the same day that China's Shanghai exchange crumbled 8% in a single session in February, bulk container maker Greif showed the value of cutting losses short.

Things looked good when Greif broke out of a seven-week, cup-with-handle base on Feb. 20. Volume was strong as shares spiked 6% above a 59.12 buy point 16oint 1).

But five days later, the Shanghai market sold off, dragging U.S. indexes along with it. Greif, with its fortunes tightly linked to China's export trade, dropped 8% in one session (point 2), leaving it 4% below its ideal buy point.

That kind of sharp drop in big volume so soon after a breakout is a bearish sign. But the stock hadn't triggered the 7% to 8% sell rule yet, so you could've held it.

Greif climbed for two days, offering a little false hope. But it then fell 9% below the buy point 14 two sessions (point 3). Time to sell.

Also in February, Tesco was riding a handle on a 23-week base with a 21.67 buy point.
Cutting losses short on Greif and funneling your money into Tesco would've produced strong results. The stock broke out above its buy point 13arch 1, banking a 56% gain by May 18.

At the same time, Gulfmark Offshore had settled just below a buy point 15f 41 on a 12-week, cup-shaped base, following a quick, one-day spike on Feb. 26. A Greif alumnus who bought Gulfmark as it broke out above that buy point 14 March 9 would've banked a 15% profit by May 3.

Also at the same time, Bolt Technology broke out of a 10-week cup-shaped base Feb. 26. The seismic data specialist pulled back with the Shanghai downturn. It then rebounded from its 50-day moving average, breaking out past a 26.05 buy point 13arch 8. By May 7 the stock was up 76%. The cost of staying with Greif for that same period? An additional 6% loss.


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