Trouble is part of any endeavor.
A retired boxer was asked to evaluate a kid who wanted to go pro. After watching a workout, he told the kid that he had the hand speed but not the foot speed. Feet get a boxer out of trouble, he said. Without it, you lose.
Most people don't think about foot speed when they think about boxing. Likewise, too few investors think about getting out of trouble quickly when a stock starts to pound them with losses.
All investors will eventually find themselves in a losing situation. How quickly they recognize and escape that situation is what separates winners from losers.
Here's how some experienced stock-market winners escaped serious trouble: • Gerald Loeb: In "," IBD founder and Chairman William O'Neil writes about a conversation he had with the E.F. Hutton co-founder. He asked Loeb if he followed the advice of his book and always cut losses at 10%. "I would hope to be out long before they ever reach 10%," Loeb said.
Accomplished investors develop the judgment to get out of a stock before it hits the maximum loss they are willing to endure.
• William O'Neil: Cutting losses at 7% to 8% below the , with no exceptions, is what O'Neil advises. "The average of all your losses should be less, perhaps 5% or 6%, if you're strictly disciplined and fast on your feet," he wrote.
• Jesse Livermore: The legendary investor said, "Always sell what shows you a loss and keep what shows you a profit." Livermore favored cutting losses quickly. He set his exit at 10%. Livermore acquired this habit as a result of his early investing at bucket shops.
Bucket shops, now illegal, let people bet on whether a stock would rise or fall. A loss kicked bettors out of the game.
• William Astrop: The chairman of Astrop Advisory Corp. adds a twist to his sell rule. The money manager recommends investors sell half of a holding when it's down 5% from cost and sell the other half if it falls 10% under the entry price. That makes for a worst-case loss of 7.5% overall.
• Peter Lynch: The former manager of Fidelity Magellan isn't associated with a specific loss-cutting percentage. But in his book, "Beating the Street," Lynch cautioned against a "buy-and-forget strategy." He recommended investors do a six-month portfolio checkup to determine if the stock's story is getting better, worse or is unchanged. If it's worse, "decrease your investment," Lynch said.
Lynch noted that novice investors often pocket their gains and let their losses run.
"Some stocks go up 20%, 30% and they get rid of it and they hold onto the dogs," Lynch said in a PBS interview. "And it's sort of like watering the weeds and cutting out the flowers."