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Monday, September 28, 2009
"It never was my thinking that made big money for me. It was always my sitting. Got that? My sitting tight!" – Jesse Livermore
Jesse Livermore was one of the most respected traders of the 1920s. He built one of America's largest fortunes at the time with his skills in the stock and commodity markets. The classic book Reminiscences of a Stock Operator contains his story.
"Sitting tight" was Livermore's term for not selling when he was up 20%... 50%... or 100% on a position. Sitting tight is the art of not taking quick profits.
You see, most traders and investors get tempted to sell their winners after they see a modest profit... like, say, 33%. They get fidgety. They tell themselves that, "You can't go broke taking a profit." They always feel like they should be doing something, so they take action and jump out of the winning trade.
This strategy will kill your long-term trading performance.
For instance... I have a friend who bought shares of Brazilian oil company Petrobras in 2003 for around $5 per share. He doubled his money in just over a year... and then sold. Nothing negative happened with the position – he just got fidgety and figured a double was good enough.
It's a shame my friend didn't "sit tight," because Petrobras eventually climbed to $70 per share. He missed the chance to make 14 times his money instead of one times his money. He missed the chance to ride the huge, multi-year trend in oil stocks to its fullest extent.
That's it. When you are right on a trade – whether it's tech stocks, biotech stocks, oil, or gold – ride it for all it's worth. Don't cut your profits short. Don't sell until you see a legitimate reason for concern... like a decline of more than 15%... or an asset's refusal to rise on bullish news. One of the best ways to get rich in the stock market is to get in early on a big trend and ride it for years... You can't ride a trend if you don't sit tight.
And although we're concerned with trading here, it's worth pointing out a key fact about the world's greatest investor, Warren Buffett... Buffett's partner, Charlie Munger, claims Buffett's edge over other investors is that he "sits on his ass and reads a lot." Buffett spends most of his time sitting. And don't forget Jim Rogers' "I don't do anything until I see money lying in the corner" philosophy.
You see, you can go broke taking profits... if you allow losers to pile up and if you cut profits short. Learning how to sit tight will make sure you let winners pile up instead.
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