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No. of Recommendations: 3
NR -

Thoughts:

1 If you can't explain why General Electric is a fifty-cent dollar, sell. You can always repurchase your shares later, once the dust settles. As I pointed out in a letter to the editor that Barron's published a few months ago, GE has a negative tangible book value.

2 Selling "problem children" clears the mind, and frees up precious mental energy for other tasks which have more promising outlooks.

3 You do not have to make it back the same way you lost it.

4 Never turn a small loss into a big loss.

5 For behavioral reasons we hold on to our losers too long, waiting to get back to even. If you are waiting to get back to even, this is the wrong reason to continue owning these shares.

6 Always predetermine how much you are willing to lose before you buy the stock. This way you are less apt to get emotional about losing stocks.

7 Going forward, never lose more than minus one-times risk. If you estimate a company's intrinsic value at $55 per-share but the stock is forty due to temporary bad news, your reward is $15. Now, how much to risk? Many superinvestors advise that we invest probabilistically. Munger, for example, explains his job in racing terms: He wants to bet on a horse that has a fifty percent chance of paying three-to-one. So here, divide $15 by three and you get $5. That's your risk. You bet $5 to make $15, but if you lose $5, sell. So if the stock falls below $35, sell. You are at minus one-times risk. Sure, maybe the company is cheaper at $35 than $40. But perhaps someone else knows this company better than you, so the stock price reflects news that you aren't privy to yet. Take this framework and apply to General Electric. What is your estimate of intrinsic value? What is your reward? Where is your stop-loss? (Typically, I use cost basis minus one-third of reward.) If GE's shares are below your stop-loss, sell.

8 Read Lee Freeman-Shor's excellent The Art of Execution.

Hope these ideas help. Been there...

Hewitt
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