The National Lottery used to market itself with the tagline “You’ve got to be in it to win it!”, which means you have to buy a ticket to have any chance of winning the jackpot. I could say the same thing about investing in the stock market: you’re not going to become a market millionaire if you don’t actually invest.
Being in it is no guarantee that you’ll win it, of course, but I can guarantee that you won’t win it if you’re not in it.
Let’s look at the recent example of McCarthy & Stone (LSE: MCS) shares, which increased in price by about 40% on 23 October on news that private equity group Lone Star had put in an offer to buy the retirement homes builder for 115p per share. It’s not the first time I‘ve seen a stock’s price shoot up unexpectedly on the news of an offer having been made.
Were you in it to win it with this stock? I was! Not because I knew the news was coming, which would necessitate some insider knowledge that I didn’t have, but because – somewhat luckily – I’d incidentally invested in McCarthy & Stone shares exactly one week beforehand when the price had fallen back to its prevailing flatlined level of around 72p per share.
This wasn’t clever stock-picking, however much I’d like to think so, because this stock was simply one of many I’d bought in a diversified portfolio of positions that looked to have more upside than downside price potential. Diversification is good because it limits my downside risk of a single stock going bust while at the same time increasing the chances of being “in it to win it” with at least one successful stock pick.
So, did I sell my McCarthy & Stone shares at the first whiff of a 40% profit? No way! I’m not foolish enough to sell out too soon; I’m Foolish enough to hang in there for even higher long-term profits. However, I did place a protective stop order at a few pence below the new prevailing price, just in case Lone Star’s lone offer was taken off the table. This is my preferred use of stop orders: to protect a profit rather than lock in a loss. And, for the moment at least, it means I’m still in it to win it if the price goes even higher.
Incidentally, I recently read on a financial forum how an amateur investor had made millions in a demo trading account. Investing in a demo portfolio initially is not a bad way to learn the ropes, and this participant’s paper performance sounds impressive, but if you ask me, he hasn’t really won it because he’s not really in it…
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Tony Loton owns shares in McCarthy & Stone. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.