A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

3. If You Do Trade: Sell Losers,
Not Winners
We have seen that people are far more distressed at taking
losses than they are overjoyed at realizing gains. Thus,
paradoxically, investors might take greater risks to avoid
losses than they would to achieve equivalent gains.
Moreover, investors are likely to avoid selling stocks or
mutual funds that went down, in order to avoid the
realization of a loss and the necessity of admitting that they
made a mistake. On the other hand, investors are generally
willing to discard their winners because that enables them to
enjoy the success of being correct.
Sometimes, it is sensible to hold on to a stock that has
declined during a market meltdown, especially if you have
reason to believe the company is still successful. Moreover,

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you would suffer double the regret if you sold it and the
stock subsequently went up. But it makes no sense to hold
on to losing stocks such as Enron and WorldCom because of
the mistaken belief that if you don’t sell, you have not taken
a loss. A “paper loss” is just as real as a realized loss. The
decision not to sell is exactly the same as the decision to buy
the stock at the current price. Moreover, if you own the
stock in a taxable account, selling allows you to take a tax
loss, and the government will help cushion the blow by
lowering the amount of your taxes. Selling your winners will
add to your tax burden.
4. Other Stupid Investor Tricks
Be Wary of New Issues.
Do you think you can make lots of
money by getting in on the ground floor of the initial public
offering (IPO) of a company just coming to market?
Particularly during the great Internet bubble that collapsed in
2000, it seemed that IPOs were the sure path to riches. Some
successful IPOs began trading at two, three, and (in one case)
even seven times the price at which they were first offered to
the public. No wonder some investors came to believe that
getting in on an IPO was the easiest way to coin money in the

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stock market.
My advice is that you should not buy IPOs at their initial
offering price and that you should never buy an IPO just after
it begins trading at prices that are generally higher than the
IPO price. Historically, IPOs have been a bad deal. In
measuring all IPOs five years after their initial issuance,
researchers have found that IPOs underperform the total
stock market by about four percentage points per year. The
poor performance starts about six months after the issue is
sold. Six months is generally set as the “lockup” period,
where insiders are prohibited from selling stock to the public.
Once that constraint is lifted, the price of the stock often
tanks.
The investment results are even poorer for individual
investors. You will never be allowed to buy the really good
IPOs at the initial offering price. The hot IPOs are snapped
up by the big institutional investors or the very best wealthy
clients of the underwriting firm. If your broker calls to say
that IPO shares will be available for you, you can bet that the
new issue is a dog. Only if the brokerage firm is unable to sell
the shares to the big institutions and the best individual
clients will you be offered a chance to buy at the initial

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offering price. Hence, it will systematically turn out that you
will be buying only the poorest of the new issues. There is no
strategy I am aware of likely to lose you more money, except
perhaps the horse races or the gaming tables of Las Vegas.