Someone was asking what my 5% rule was, so let me explain.

Actually there are two rules; but like any rules, they are not hard and fast, but guidelines.

The first is, don`t buy a stock until it has had a recent 5% increase; until it has shown you it is headed in the right direction.

The second is, if a stock falls more than 5 %, sell.


The first rule instantly makes a lot of sense to most people, but they are quick to point out that by following this rule you will miss out on quick moving opportunities. That is true, but it will also protect you from loss and capital stagnation.
I have watched Goldcorp and oil stocks for several years. I think I know them pretty well. I know there trading ranges and what to expect. I bought both Goldcorp and various oil stocks on their lows, without waiting for a 5% increase. I did quite well with the oil stocks, but suffered a loss with Golcorp. So, is it worth the risk? Probably not.



The second rule, if a stock falls more than 5 %, sell, people have a much harder time embracing, but it, or a version of it, is very important. A friend of mine complained that by doing this all you are doing is admitting you were wrong and locking in your losses. That is one way of looking at it. Unfortunately that is the wrong way.
Really what you are doing is locking in any unrealized gains, and preserving capital.
Think of it this way; If a stock falls 5%, it can get back to where it was quite easily. But what if it falls 10, 20, or even 50%? A drop of 20% requires a rise of 25% to get even. That is not unheard of, but not common. A drop of 50% requires a rise of 100% to break even. Again, not impossible, but highly unlikely. And anyway, what would you rather have; a double getting you to break-even, or a 95% return?