The Best Investing Advice Is Obvious. Implementing It Is Hard.
This is my practical solution to one of the simple concepts of successful investing. I think Peter Lynch would approve.
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At the heart of successful trading and investing is a simple concept — let your winners run and cut your losers. In his classic book One Up on Wall Street, famed investor Peter Lynch put it this way: "Selling your winners and holding your losers is like cutting the flowers and watering the weeds."
This isn't surprising advice. It is impossible not to do well if you hang on to winners and dump losers before they grow very large. The problem with common sense advice like this is that it is extremely difficult to actually implement it. At what point do you declare a stock a loser and give up on it? When is a stock a winner, and what do you do to maximize the payoff?
My practical solution to this challenge is to trade the same stock in multiple time frames. Rather than make a single buy and a sale of a stock that you favor, develop a methodology where your exposure to the stock shifts depending on shorter-term factors.
Some market players call this approach "trading around a core" position, but I suggest a more structured approach where the time frames are clearly established and considered independently.
For example, I recently discussed Rocket Pharmaceuticals RCKT as a top stock pick for 2025. I expect the stock to produce a solid gain over the course of the year, but I also expect it to be highly volatile. It is going to jump around quite a bit.
If you are holding a long-term core position, that can be quite annoying because much of the shorter-term movement has absolutely nothing to do with the longer-term prospects. Investors such as Warren Buffett just ignore that noise, but part of the reason he ignores it is that he is too big to take advantage of it. The more money you invest, the less flexibility you have. It is much harder to aggressively trade a $10 million position than a $10,000 position.
Small investors have a tremendous advantage due to their flexibility and speed, but they squander that strength by trying to invest like giant mutual funds. There is a perception that the best way to grow very rich in the market is through a long-term buy-and-hold approach. That is true once you have a portfolio of size, but a good trader can produce much more sizable returns with small accounts because they can be so much more aggressive.
The starting point of all of this is to find a stock you like, such as Rocket Pharmaceuticals, in my case. Once I do fundamental research, I will take an initial position to follow the stock closely and learn more about it. Unlike the traditional way of investing, that first buy isn't that important. The goal is to put the stock on your radar and become more familiar with its business and the way it trades.
Once that small position is in place, the next step is to look for opportunities to build it. Keep watching the chart and look for an opportunity to add shares. You will often find yourself rooting for the stock to decline so that you can ramp up the position.
Quite often, I see people complaining about the poor price action in stocks that they love. The problem isn't the stock. The problem is that these investors don't have any flexibility to take advantage of the weak price action. Every stock will eventually offer short-term opportunities if you are looking for them.
Small investors have a tremendous advantage due to their flexibility and speed, but they squander that strength by trying to invest like giant mutual funds.
In the case of Rocket Pharmaceuticals, it already had a very good short-term bounce, and I traded some shares during that time frame. If it doesn't go straight up from here, then I am in good shape to buy some pullbacks because I have reduced my short-term holdings.
The goal is to reduce the shorter-term shares when market conditions or the chart pattern looks weak and to increase the short-term position when technical conditions are favorable. Build the position when the short term looks good and reduce it when it looks poor, but keep that core position in place so that you still have exposure and don't lose track of something that is fundamentally strong.
The theory behind this approach is that the market is going to misprice a good stock — in both directions — much of the time, which is an opportunity for astute investors. If you are confident about fundamentals, then you can be more aggressive in the short term when the market is worried about other things.
Be fast to cut losses in shorter-term positions and not so fast in longer-term positions, but do it with a stock that you love. That is how you implement Peter Lynch's common sense advice.
I'll have much more discussion of this approach in future columns, but the best way to get started is to make small buys initially and look to make two or three buys to establish your core position. Plan on the stock going down immediately after you buy it. Don't worry too much about exact entry points if you like the stock. Just be ready for ordinary volatility.
At the time of publication, Rev Shark was long RCKT.
