Back to the stock market, I wanted to relay an email I got from a valued subscriber just this week:

“A number of weeks back I purchased Thoratec (THOR) after reading about it in Cabot Market Letter. I missed the trigger to sell my shares when it dropped below 20% of its purchase price, and it continued down to nearly 30% below.  When it popped just before Thanksgiving the stock was at 14% below purchase price and I took the opportunity to sell my shares.  Over Thanksgiving break it was added to the S&P 500 Midcap index, and on Friday it gapped up big.  Since its new heart pump’s results have come in, the stock price has jumped further …

“I sure feel silly to have sold the stock just as it started its climb.  So I guess I’m wondering what I should have done differently, and how should I approach it now that I’ve been burned by it already?”

S.L.

Really, this email is all about how people think about their stocks, portfolios, profits and losses.  And it’s not just this subscriber–I’ve fielded hundreds of similar questions during the past few years.

First off, I think it’s great to look at your past trades and try to learn from them.  So don’t let anything I write below change that.

However, if you sell a stock and it goes up, that doesn’t necessarily mean you made an error.  Sure, there’s always room for improvement, but nobody is going to buy at the bottom and sell at the top (except the liars).  Nobody.

In this case, the investor cut his loss (after first being bailed out by the stock), and the stock went higher.  But was cutting the loss really the wrong thing to do?  Maybe the wrong piece of the puzzle was the buy point–it may have been ill timed, because the market was in a downtrend, or because the stock was extended.

And, for the record, I’m pretty sure he bought the stock on my recommendation, so I’m not putting him down–I’m just pointing out that cutting your loss is never really “wrong,” in my opinion.  What if THOR had continued lower another 10%, 20% or 30%?  That would have meant big trouble, as it has for so many investors in so many stocks this year.

Moreover, the stock didn’t “burn” this subscriber; yes, he might have missed out on some upside from where he sold.  But lost opportunity is not lost money!  The market is going to present hundreds of chances to make a profit in the years ahead, so it’s not like missing out on this upmove in THOR should make anyone feel silly.  Far from it.

In this case, I don’t think there’s much he could have done differently–except cut the loss short the first time it broke his loss limit.  Yes, that would have meant an even bigger loss than he ended up with, but remember, your goal isn’t to make the most money on every trade.  Your goal is to make the most money you can over time.  There’s a big difference.

If you follow a proven system (like cutting your losses), it doesn’t mean you’ll always be on the right side of things.  But it does mean you’ll come out richer in the end.

I also want to point out that it’s usually the investors who don’t have a proven system that get so nervous and anxious about the market, the future, what their stocks might do, etc.  You have to believe in the discipline you’re using.  If you do, you won’t be second-guessing yourself after every missed opportunity–you’ll be confident enough to realize it was just a bad break, and that another great opportunity will more than make up for it.

Take this as a little pep talk.  Making money in the market is difficult, especially this year.  So don’t feel silly or beat yourself up a poor trade or two–oftentimes, as in this case, it was just a bad market, or bad luck.  Simple as that.