How to Actually Make Money With Stocks
Investing Psychology #3: Why Most Investors Give Back What They Made
This is a Wise & Wealthy Academy post. Every week, I publish a new training that focuses on a single idea from one of four areas: clear thinking, personal execution, career antifragility, and investing psychology.
Most investors know how to buy. Almost nobody knows when to sell.
That gap is where months of gains disappear in a matter of days.
I learned this the hard way. Early in my investing career, I watched a position double. Then keep going. I held because it was still moving.
Then it turned. Then I told myself it would come back. By the time I sold, most of the profit was gone.
That cycle repeated enough times that I realized the problem wasn’t my stock picking. It was that I had a system for getting in and no system for getting out.
In this short video I recorded, I walk through how I think about taking profit:
The Problem With “Let Your Winners Run”
The most repeated piece of investing advice is to cut your losers and let your winners run.
It’s true. But it’s incomplete.
If you let your winners run indefinitely, eventually they stop running. Every trend ends. Every bull market turns. Every stock that went up 300% gives back a significant portion before most people sell.
The investor who held a stock from $160 to $450 and then watched it fall to $220 didn’t let a winner run. They let a winner become a smaller winner, or worse, watched years of gains evaporate.
Jesse Livermore, one of the greatest traders who ever lived, understood this better than anyone. He made and lost multiple fortunes on Wall Street, and his most important lesson wasn’t about when to buy. It was about when to sell.
His rule: As long as a stock is acting right and the market is right, don’t be in a hurry to take profits.
But the moment the trend shows signs of exhaustion, you exit. You don’t wait for confirmation that it’s over. By the time it’s confirmed, you’ve given back too much.
The market never rings a bell at the top.
The system for knowing when to sell is what separates investors who keep their gains from those who give them back.
I cover the full framework below.