WINNER AND LOSSER

In the late 1800s, Daniel Drew proposed that investors 'Cut your losses and let your profits run.' This forever after became one of the most commonly quoted theories for investors. Most consider it a sound concept; in fact, it is one of the most important understandings an investor can have about the stock market. But one obvious question leaps from this theory-- exactly what is a 'winner' and what is a 'loser'?

Is any stock that drops in price a loser? A price drop certainly costs an investor money-- at least on paper. But selling every stock when its price falls a bit will be irrational and expensive, so another definition of 'loser' is required for this theory. A good place to start is to determine if the price fall is a result of an overall market decline (a bear market), or due to specific concerns about the particular industry or company.

Most investors look for the following telltale signs of concern to determine if a particular stock might become a 'loser':

• Declining sales quarter-to-quarter and year-to-year
• Rising debt levels
• Declining profit margins
• Rising inventory levels
• Changes in regulatory or legal environment
• Emerging competitiors or technologies
• Rising interest rates
• An emerging overall bear market
• Events that negatively impact future earnings
• Mergers and acquisitions
• Management changes
• Institutional or insider selling
• Dividend cut or elimination
• Concerns over accounting procedures