Don’t Dismiss This Classic Market Wisdom

Sep 24, 2021

If you’ve been investing for long, you may be familiar with the old Wall Street adage “the trend is your friend.”

But if you’re like most folks, you probably haven’t given much thought to what it means in practice.

I think that’s a mistake.

You see, hidden inside this simple phrase is one of the few real “secrets” of successful investing. And I can tell you from experience that taking this wisdom to heart can make a huge difference in your long-term returns.

So, what’s the secret?

The following quote — attributed to legendary trader Jesse Livermore in the excellent book “Reminiscences of a Stock Operator” — sums it up well:

After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!

It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine — that is, they made no real money out of it.

Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.

In other words, choosing a great stock or investment — while important — is relatively easy.

What separates the most successful investors from everyone else is the ability to hold on to a great investment as long as it performs well.

The best investors literally make the trend their friend.

Unfortunately, most investors aren’t able to do this.

Most folks inevitably find a reason to sell a great investment prematurely and end up leaving huge potential gains on the table. And that “reason” is usually based on emotions — mainly boredom and fear — rather than logic.

So, if you want to become a successful investor, you must find a way to keep your emotions in check.

Boredom is probably the easiest to address.

The reality is that profitable investing is often pretty dull. There’s no surer way to become wealthy than compounding your money in quality investments. But unlike gambling or speculating — which can double your money overnight if you’re lucky — building wealth through investing requires time and patience.

Simply being aware of this fact is often enough to keep you from doing anything rash. But you might also choose to allocate a small percentage of your portfolio to a trading account, so you can still scratch your speculative itch without risking your investment returns.

Keeping fear in check can be more difficult. That’s because there are almost always compelling reasons to sell any investment.

The solution is to have a clear, predetermined exit plan for every investment you own.

As regular Money Talks readers know, I prefer trailing stop losses. But any exit strategy is better than none. The most important thing is to follow that strategy no matter what.

Today’s market environment is a perfect example. Right now, I could point to plenty of reasons to sell stocks.

The overall market is as expensive as it’s ever been in history. Most stocks have enjoyed a massive rally over the past 18 months and are overdue for a correction. Inflation is rising at the fastest pace in decades. The Federal Reserve is threatening to pull back its massive stimulus efforts. China could be on the verge of a serious debt crisis.

All these things are technically true. But despite these concerns, the trend is still intact.

As I showed you last month, our powerful TradeSmith market health indicators show that all 12 major market indexes we follow (except for China) — and all 11 market sectors here in the U.S. — are still healthy today.

Likewise, the individual investments I own in my investment portfolios generally remain healthy today too. (And I suspect that’s probably the case for those of you who are TradeSmith subscribers as well.)

Is it possible one or more of the risks I mentioned earlier — or another one we aren’t even aware of — could trigger another crash or bear market in the months ahead?

Of course. Anything is possible.

But as I just mentioned, we don’t currently see any indication that it is likely today. And unless something changes — unless the trend begins to move against us or our Bearseye signal is triggered — there is simply no reason to sell otherwise healthy investments right now.

You would be selling out of fear, not logic. That’s almost always a terrible idea — and if history is any indication, it could mean missing out on some big potential returns.

For now, I believe the best course of action is to sit tight, stick to your plan, and let your stop losses tell you if and when to sell individual positions.

Do you agree? Let me know at [email protected]. As always, I can’t respond to every email, but I personally read them all.