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Pragmatic Investing Practices And Techniques

An Excerpt from the Updated Edition of Full Of Bull, Unscramble Wall Street Doubletalk To Protect And Build Your Portfolio
by Stephen T. Mcclellan, CFA

After you have a grasp of overall investment strategies, there are some pragmatic investing practices that I recommend. These are the mechanics that should help optimize results and prevent emotional reactions that can cause an investor to make the wrong transaction decision. Think of it like football. After a winning game plan has been established, each individual play must be executed. It is important to have good technique.

Do Not Be In Denial; Move On

When a stock holding has cratered and the prospects for the company have turned bleak, do not get trapped in a state of denial. Take the loss and move on. Holding on despite continuing price erosion just compounds the first mistake. Investors sometimes hold the naive attitude, "I can't afford such a big loss. I'll just hold on to it." Bad move. Your investment capital can always be better engaged in a more promising stock.

When You've Decided, Take Action

After researching, analyzing, and considering, and finally determining an investment choice, pull the trigger. Do not sit around and hesitate. Make the move. And do not quibble over pennies per share in price. Limit orders are appropriate when the stock is not actively traded. But do no try to low-ball a purchase price or be too greedy on a sell. Implementation is more critical on the sale. Do not try to be too cute and waste time on the exit. Your order might not get completed. Trust your conclusion. Have confidence in your decision. There is nothing more exasperating than making the correct investment decision and not benefiting because you have procrastinated or messed up the simple process of concluding the transaction.

Flag Your Purchase Date; Focus on the One-Year Mark

Note the date when a stock investment passes the one-year holding period, which is when the reduced 15% federal long-term capital gains tax rate kicks in. After a stock has been owned for a year, it is easier to take a long-term view and ascertain whether your original investment thesis is proving to be correct. Early in my career, I was embarrassed a few times when I--stupidly--pulled the trigger on a sale a mere week or two before the holding period went long-term; that is, just before the one-year mark. I should never have sacrificed the bargain 15% tax rate. The corollary to this advice is to avoid allowing tax considerations to overrule or heavily influence basic investment decisions. Your objective should be sound long-term investing, not juggling year-end tax liabilities. The amount sacrificed in making the wrong investment call dwarfs the pittance of savings in taxes. Sure, sometimes it might be worth waiting a week or two to gain a tax advantage, if the circumstances allow. But usually it is a risky maneuver. When you've decided, take action.

Short-Term Trading Positions Should Be Contracted

Once in a while, there might be a rare short-term trading opportunity, say when a stock has plummeted on an overreaction to negative news and a "dead cat bounce" or rebound is expected, or when favorable news seems imminent or you anticipate a forthcoming negative event. If it is a trade, stick to the short-term plan, and eliminate the position within a limited time frame regardless of whether the idea was a winner or a nonevent. Do not let the stock sit around and clutter up your portfolio with only a modest gain. If it is a trading position, do not be pacified or lulled beyond a short couple months' span.

Avoid Selling the Day of a Dramatic Downgrade

Most of the damage to a stock has already has been done within an hour or so after a summary drop in an investment opinion is issued by a brokerage analyst. Do not get caught up in the emotional rush to the door. There is invariably a bounce back the next day, or within a week or so. Hold your fire for a better selling opportunity after the dust settles. And you probably should not sell anyway. Do not do what Wall Street says. The same goes for a striking opinion upgrade. Wait a day or two for the excitement to abate and the stock to back off. And this holds true for stocks that are added to or deleted from brokerage recommended lists. Delay any transaction until the initial commotion wanes.

©2008 Stephen T. McClellan, CFA

Stephen T. McClellan CFA
, is a former Wall Street investment analyst with 32 years of experience covering high-tech stocks. He spent 18 years as First VP at Merrill Lynch and eight years as VP at Salomon Brothers. McClellan has ranked on the Institutional Investor All-American Research Team for 19 straight years and on the Wall Street Journal Poll for seven years. He is in the Journal's Analysts Hall of Fame.

McClellan is former President of the Computer Industry Analyst Group and the Software/Services Analyst Group. He has been a guest on CBS, CNN, CNBC, and Wall $treet Week and has presented to many leading technology companies including IBM, Apple, ADP, and EDS. He is the author of the national best-seller The Coming Computer Industry Shakeout: Winners, Losers, and Survivors, and his work has also been published in The New York Times, Financial Times, Forbes, and other leading publications.

He holds an MBA in Finance from George Washington University and resides in San Francisco with his wife, Elizabeth Barlow, an artist.

For more information about investing in todays' stock market, read the Updated Edition of Full Of Bull, Unscramble Wall Street Doubletalk To Prevent And Build Your Portfolio, by Stephen T. McClellan.


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