Did you remember the last time you bought a stock or mutual fund? If you are like the majority of the investors, the equity was recommended by your broker or a friend. You did research and received copious pieces of paper praising its attributes.

Because there are thousands of stocks and also thousands of mutual funds it is difficult to know where to look. Most folks like to buy stock in a company they think they know. You did notice I said “think” they know. Almost any of the papers about the company are pretty well dated by the time you see them especially those pretty full color slick sheets and binders.

Keep gathering information and even buying a report from Morningstar. They are the nexus of financial information. Some of it may be 6 months old, but you have no way of knowing that. Just about everything you can get your hands on will give praise to this wonderful company. It must be good. Right?

You are convinced so you buy some stock. The trap is sprung. After a while the stock price hasn’t changed much so you hang in there. Then it begins to head down. You continue to hold it. It will come back. That’s what the broker said, but this little hummer continues to slowly erode. You are beginning to have doubts about it, but still no thought of selling. No point in looking at it every day. Just put it away.

There was a time when you could have sold out for a small loss, but you didn’t. Why didn’t you take the small loss instead of being saddled with a loss of more than 50%? And it still doesn’t look good.

When anyone becomes involved with something the very act of observation makes the observer part of the observed. That is a basic physics principle. When an investor does research he starts binding himself to that stock. The more it is studied the tighter the bond. The bond is cemented when the purchase is made. Now a new thought process enters when the stock does not perform as expected. The investor will not admit he was wrong. He refuses to sell.

Almost every investor thinks of where to buy and never thinks of protecting his cash. The professional trader looks first to the risk with an exit strategy should he be wrong. Being right takes care of itself. Working with a profit base is easier than trying to hold to a losing position.

The professional looks at his cash as inventory. He can’t allow it to slip away so he does everything possible to protect it from loss. His thought process is almost exactly opposite that of the amateur. Small losses don’t bother him.

Until the average investor learns to disconnect from his psychological inhibitions and use an exit strategy he will not make money in the stock market.

Next Investment Article:
What is Value Investing?
Whether appropriate or not, the term "value investing" is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend......