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Portfolio Update

Embrace the Correction

By Elliott H. Gue, on Oct. 8, 2014

First published in 1927, Reminiscences of a Stock Operator is a thinly veiled biography of Jesse Livermore, one of the early 20th century’s most successful traders.

Livermore was an early investing celebrity, and many sought to emulate his strategies and follow his lead into specific stocks and sectors.

However, much like Warren Buffett and Carl Icahn today, Livermore always seemed to be one step ahead of the crowd; he was one of the few investors to invest profitably during the Roaring ‘20s and the Great Crash of 1929.

One of the best pieces of investing advice in the book: “Be right and sit tight.” Livermore said that sitting made him the most money in the stock market.

This adage rings true almost 90 years after the biography was first published. Far too many investors attempt to time minor corrections in the stock market, selling their most profitable holdings in anticipation of a pullback and hoping to buy them back at the bottom.

Of course, it’s almost impossible to execute this seemingly simple strategy consistently and effectively. All too often, investors miss out on significant upside by liquidating their positions long before the feared selloff materializes. And when a correction finally occurs, many are too scared to buy the drip.

The 24-hour news media feeds into this costly mistake. In a quest to attract eyeballs and advertisers journalists look for ways to make the most mundane trends in the financial markets appear exciting. This phenomenon explains why some sensationalist pundits describe a routine 0.5 percent selloff in the stock market as a rout.

Deciding when to sell a stock is oftentimes more difficult than buying shares. And when fear and greed drive these decisions expensive mistakes occur all too easily.

With the Wealth Builders Portfolio, we aim to keep emotion out of the investing process as much as possible. Our goal is to identify profitable growth stories in particular sectors and industries and highlight the names that are best-positioned to benefit from these trends.

Although we prefer the big profits we took on Adobe Systems (NSDQ: ADBE), BorgWarner (NYSE: BWA) and Micron Technologies (NSDQ: MU), we have no qualms about pulling the plug on ideas that don’t pan out to prevent a small gain or a slight loss from turning into a major headache.

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