Josh Brown had a fun post up yesterday about his Twenty Common Sense Investing Rules. While I would probably frame some of the points differently and don't necessarily agree with all of them, there is plenty of utility in the post.
Josh's number 4:
The moment a stock disappoints you or makes you wish you hadn't bought it, sell it. Immediately and regardless of price. Life is too short to hope a bad decision reverses itself.
This is tricky because there have been many exceptions over the years -- actually too many for me to take this rule at face value. When a stock misses earnings by a few pennies and takes a 10% drop, selling might be the right thing but it may not. What I mean is that some sort of disappointment might merit revisiting the investment thesis to see if it is still valid and then making a decision.
For example, in late 2002 and into 2003 Altria (NYSE:MO) was facing some serious problems as this was the height of the lawsuit frenzy around tobacco litigation. The market was generally doing poorly but MO almost cut in half during this time. This was a bad stretch for the stock but for the last ten years it is up 151% (per Morningstar, which I believe includes the dividends) compared to 16% for the S&P 500 (SPX including dividends might be about 36%).
The other side of the coin might be Yahoo (NASDAQ:YHOO). At some point it went from owning the world to something akin to a no growth utility. The reason to mention these two specifically is because I have owned both for clients. We sold Yahoo a few Mays ago when Microsoft (NASDAQ:MSFT) wanted to buy it but Jerry Yang famously said no; and we kept Philip Morris International (NYSE:PM) as an across the board holding but some clients still have some MO.
While no one can be right 100% of the time, this part of the management process requires understanding not just the stocks that you own but also the respective industries that your holdings are in.
Josh also has several bullet points about not being emotional; don't get too excited and don't get too angry. This is of course correct. No matter what type of investor you are or what you own, there will be times that you are wrong. This is guaranteed to happen. If you know this ahead of time then it should lessen the emotional toll when it happens. Similarly there will be times when the market goes down a lot. We know this rationally but we seem to forget our well reasoned understanding of large declines when they actually happen.
It probably takes some training but the extent you remove the emotional highs and lows, the better your long term result will be.
The other point to share from Josh is, don't blow up. Any market segment, -- I'll repeat that: any market segment -- can blow up. Blowups are improbable but they are not impossible. You might be heavy in some area that has a very low probability of blowing up but if it does then you will be in a world of hurt. Trust me when I tell you, things that could never blow up have indeed blown up in the past and this sort of blow-up will happen in the future. Your weighting will determine the magnitude of the consequence.