Ian Woodward's Investing Blog

Don’t Play SNAKES & LADDERS with your Money

Investing, Trading or Playing in the stock market is like playing the game of “Snakes and Ladders”.  I remember as a little boy playing Snakes and Ladders – they call it “Chutes and Ladders” in this country.  I’m sure you remember it; you throw the dice and if your marker counts over to the bottom of a ladder you trot up to the top of the ladder.  If you hit a snake (or a chute), down you go the length of the snake.  It was frustrating in trying to get all the way from 1 to 100 on the board, too many snakes!  Somewhat analogous to the chances being few and far between of finding a stock surviving to deliver $1 million, 15 years from now, off your initial bet of $10,000 today.  Also some snakes are longer than others meaning corrections can vary, but can hurt you if they turn into a bear market.

Some prefer that the bird in the hand is worth more than two in the bush; never allow one’s hard earned profits to vanish.  I like to have my cake and eat it too.  With that in mind, if a stock has made 50% gain I will invariably take 70% off the table and let the rest run as long as it does not turn into a loss.  Likewise, I need hardly tell you that if a stock is 100% above its 200 Day Moving average (200-dma), it is invariably very extended and most fund managers as a rule of thumb will take half off.  Both examples take your Capital off the table, and what remains is profit to do as you wish.

My so called “Mattress Stuffers” portfolio comes from stocks that have proven themselves over time, but not before I have taken some profits along the way and I then let the rest ride as long as the stock continues to rise.  They remain so until the company, stock, and market tell me to take profits and have the discipline to get back into the same stock when the coast is clear.  Never let your Mattress Stuffers get lumpy.  Let me elaborate:

We must find ways to avoid the snakes and run with stocks when they land on ladders.  At the start of a fresh game, a fresh bull market, one can be more daring in letting one’s profits run.  When the bull gets tired, play it closer to the vest.  Likewise, if a stock or the market has had a good run, the odds increase that it will correct.  It may be a perfectly good company, but if the stock gets ahead of itself or has a climax run, why give up the profits of a sure fall?  Take the money off the table, wait for the pause to refresh, and hop back on when the coast is clear.

This “pause” may be 6-8 weeks, 6-8 months, 16-18 months, or never; depending on the behav­ior of the market, stock, and company. It is easier said than done.  It takes discipline to stick with such a strategy – our biggest enemies, fear and greed, lead us to mistakes.  I believe the High Growth Stock (HGS) discipline enables one to hop on and off the ladders fairly successfully.  Off the ladder, one’s money is parked safely waiting for the stock to refresh, the market to turn from -MMM to +MMM, i.e., from a heavy correction to a new bull rally, or the company to regain its footing.

Of course the best of us can’t time things that perfectly.  But my point is when you give me 15 years to play the ball game with a fresh and young star of a company like XRX or IBM in the early 1960’s and 1970’s, a WMT or HD back in the 1980’s, or an AMGN, MSFT, CSCO and INTC in the 1990’s, having spotted them in their formative Growth Period there comes a time when either the Market or the Stock or both have matured and then turn sour.  It makes no sense to sit tight through Bear Market Corrections that can eat all one’s hard earned profits up in a short period of time.  We don’t have to go back that far; think about QUALCOMM (QCOM) at $960 back in its hey-day before the dot.com bubble burst in March of 2000, or even Google (GOOG) which is the biggest star of this new century, which will surely do as well in time to come. The major dips one avoids will make up for the few rungs of the ladder one may have missed – by far!

As the song goes, “Learn when to hold them, and learn when to fold them”, but always come back to play another day, especially with stocks that have been profitable for you and are just pausing to refresh.  All the more reason to sell, hopping on again later.  Let your profits run or you never get hurt taking profits are old adages in the Stock Market, but don’t play Snakes and Ladders with your money.

Copyright © 2007-2010 Ian Woodward
Disclaimer: Commentaries on this Blog are not to be construed as recommendations to buy or sell the market and/or specific securites. The consumer of the information is responsible for their own investment decisions.