It's easy to get emotionally attached to a stock. Maybe you're enamored of the company's products, its growth story or its new superstar CEO.
But thinking that you've latched on to a big winner that will never correct big time someday can cloud your judgment and cause you to lose a lot of money.
Of course, it's impossible to take emotions completely out of your buy and sell decisions. But a strict adherence to rules laid down in IBD's CAN SLIM investing system can help minimize the emotional component of investing.
These rules emphasize the importance of buying a stock only when it breaks out of a sound base in heavy volume during a market uptrend. Don't buy it before it reaches the buy point and don't buy it after it's risen more than 5% past the entry.
Also, consider taking profits at 20% to 25%, as most stocks tend to consolidate at that point and form new bases.
Among the many rules on the sell side, perhaps the most important is to cut your losses at 7% to 8% and avoid letting a double-digit gain turn into a loss.
Keurig Green Mountain (GMCR) was an easy stock to love during its big run from the middle of 2009 to its peak more than two years later.
From its breakout past a 21.33 buy point in the week ended July 24, 2009, the maker of Keurig one-cup coffee makers soared 444% en route to a peak of 115.98 in the week ended Sept. 23, 2011.
Keurig's machines gained popularity because they made it fast and easy to brew a good cup of coffee without the hassle of measuring out the grounds and cleaning up the mess.
Investors may have assumed that the machines would eventually replace traditional coffee brewers and that the stock had a lot more room to run.
After all, the stock was continuing to post huge sales and profit growth in the first three quarters of 2011.
This may have caused some investors to miss or ignore some technical sell signals after the stock cleared a 111.52 buy point in the week ended Sept. 16, 2011.
First, the base was late stage and therefore much riskier than those that form earlier in a stock's advance. That alone should have put investors on alert for sell signals.
Trouble came in the week ended Sept. 23, when the stock fell more than 8% below its buy point (1), triggering a sell signal. The stock continued to get support at its 10-week moving average, however, so die-hards may have chosen to hang on.
Yet the stock continued to fall the next week, slicing through its 10-week moving average. Volume was light, but a check of the daily chart showed that turnover was heavy as it sliced through its 50-day moving average on Sept. 29. Those who shrugged off that sell signal were given a final warning the following week, when the stock fell further in heavy volume (2).
Five weeks later, Keurig had lost 62% of its value after suffering two big downward spikes in the highest weekly volume since its run began. It hit a low of 34.06 in the week ended Nov. 11, 2011.
The lesson of Keurig is that greed can be your biggest enemy, especially with growth stocks. Once they peak, they simply can plunge quickly from lofty heights.