Steve's note: My friend and colleague Dr. Richard Smith turns ordinary investors into extraordinary ones... And on Thursday night, he'll be joining us for an important event. He will show you how it can help you safely invest more capital using his simple system.
Today's DailyWealth essay is from a couple years ago... But the message is just as powerful now. And at the end, I'll explain how to join us this Thursday night...
Dr. Richard Smith can make you a lot more money from your investments.
Richard just spent a few days in town, and it reminded me of a couple things... For one thing, he's one of the smartest and nicest guys I know. He's also made a lifelong commitment to helping individual investors become better investors.
That commitment started from his own huge investing mistakes...
After graduating from Cal-Berkeley (one of the nation's top schools in math), Richard got a PhD in "mathematical systems theory."
In short, he knows numbers. But that didn't save him in the dot-com bust in 2000. Like many investors, he got "burned."
He vowed to never let that happen again. So he set out to figure out how to avoid similar losses in the future. He wanted to prevent other people from making the same investing mistakes he did...
Richard started looking into what the top traders were doing... guys like the ones in the popular Market Wizards investment books, for example, who had turned small piles of money into very large ones.
It turned out "cutting your losses early" was a common theme across all those successful investors.
Individual investors typically don't do this... because they typically have no "exit strategy." They have reasons to buy a stock, but they don't have a clue when to sell. Meanwhile, a successful trade is made up of two parts – a smart entry and a smart exit.
After much study, Richard believes the simplest thing individual investors can do to continually increase the value of their portfolios is to make sure they have an exit plan that includes cutting their losses early.
The simplest way to do that is through using "trailing stops."
If you're not familiar with trailing stops, the concept is simple... Think about each word individually: "Stop" is to stop your loss – to not let something fall by more than a certain percent. If it does, you sell.
The "trailing" part of "trailing stop" means that your "stop" can move – if your stock hits a new high, your stop moves up higher, too – it "trails" new highs in your investment.
Let me show you what I mean with a trade we made several years ago in my True Wealth newsletter...
In April 2007, when we entered the trade, one of China's big oil producers, PetroChina, traded around $113 per share. In 2009, PetroChina traded around $115. So after about two years, the stock had basically done nothing.
But here's how we traded it in True Wealth...
The stock soared soon after we bought it. Shares made it all the way up to more than $250. And we simply followed our rules. We sold half after we were up 100%. Then, when the stock fell 25% (hitting our trailing stop), we sold the rest.
Richard created a simple website that tracks these things for you. He calls it TradeStops.
You enter your stock symbol, the date you bought your stock, and the percentage trailing stop you want to use. TradeStops automatically adjusts your trailing stops for you. It will also send you an e-mail or a text message when your stock hits its trailing stop.
Richard's website allows you to do fancier trailing stops if you prefer. But I don't think you need to get fancier than this...
To be a more successful trader and investor, you must have an exit strategy. Richard believes the simplest thing most individual investors can do to improve is to use trailing stops. That's why he created TradeStops. His website is the simplest way I know to create and easily follow a rational exit plan... and keep you in the money.
P.S. If you want to hear more from Richard, I'm sitting down with him and Porter Stansberry this Thursday, May 10, at 8 p.m. Eastern time. We'll talk about his incredible system... And he'll explain how it can help you get more capital gains from your biggest winners.
I strongly encourage you to join us... I can't think of an easier way for you to improve your investing results than by simply listening in. You can learn more about how to tune in for free right here.
See you then...
Cutting your losses is only one ingredient of success – you must also get the most out of your winners. In a recent essay, Richard Smith shares another way to improve your investing gains... Learn more here: The Secret to Buffett's Success.
Trailing stops can help you make wise choices as an investor – even when you believe "this time is different." Read more about fighting these dangerous misconceptions in Steve's essay: Financial Disasters Don't Repeat, But They Rhyme.
My colleague Dan Ferris knows taking just one big loss can be devastating to long-term investor performance. That's why he recommends using "negative advice" to save money and make smart investment decisions...
THIS MAJOR SHIFT CONTINUES TO PLAY OUT
Today, we're looking at the evolution of the American shopper...
Longtime readers know we love to put our money to work in big secular trends. And since the start of the 21st century, one of the biggest has been the rise of online shopping. In the U.S., e-commerce sales have surged from about $27 billion in 2000 to more than $453 billion last year. It's clear this trend is here to stay...
Just look at online marketplace Etsy (ETSY). The company allows people to sell handmade goods – everything from charm necklaces to wedding invitations. Etsy takes its cut from listings and transactions. And business is booming today... Last quarter, Etsy broke more than $1 billion in gross merchandise sales for the first time ever. As a result, its revenue jumped 24% year over year.
As you can see, investors loved the news... Etsy's stock has soared around 50% since the earnings report in late February, and shares recently broke out to a new all-time high. This business should continue to perform well as Americans do more of their shopping online...