Brad’s Note: We all dream of buying great companies and then sitting back and getting rich. And we all dread watching a company we buy crash… and crash… and crash.

But there is an important difference between good long-term investing and being foolish.

In today’s essay, Wide Moat analyst Adam Galas will share how cutting your losses is sometimes the best way to preserve the health of your portfolio.

By being able to recognize the signs of a losing trade, you can avoid a common mistake many investors make.

Here’s Adam…

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In 2020, my father made a catastrophic mistake.

At the time, Alibaba (BABA) was the Amazon of China, and analysts expected nearly 25% annual growth for decades.

So he bought shares for his 401K… a foolish 65% of his portfolio.

But Alibaba is a speculative play. And when the world changed drastically, so did BABA’s prospects. 25% annual growth fell to 8%, and the stock crashed by almost 60%.

My father’s 401K and retirement dreams were devastated, losing 40% of its value in a year.

With just 10 years left until retirement and most of his retirement funds tied up in a losing stock, it didn’t look great for my father…

No one likes to admit they were wrong about a stock. But even the best investors in history are right just 60% to 80% of the time. So how do legendary billionaires like Warren Buffett manage to deliver 20%-plus long-term returns even when up to 40% of their investments don’t work out?

By knowing when to sell companies after their investment fundamentals have broken… and buying better blue chips whose prospects are as strong as ever instead. 

Let me show you why it’s not just OK to sell underperforming companies but why now might be the best time in years to do so.

Dividend Cuts Are a Signal to Sell

According to JPMorgan, between 1980 and 2020, 44% of all U.S. stocks suffered “catastrophic and permanent” declines. That means they fell 70% or more and never recovered, not even after 40 years.

And some blue-chip stocks weren’t immune, either.

Let’s use General Electric (GE) as the ultimate example of how even the world’s greatest companies can fail. Back in 2000, GE was considered one of the greatest stocks in the world.

• It had an A-credit rating.

• It was dividend aristocrat, meaning it had over 25 years of consecutive dividend raises.

• It held the title of “World’s Most Valuable Company.”

• The late Jack Welch, its CEO at the time, was named Fortune’s “Manager of the Century.”

GE was seemingly unsinkable, the safest of the safe. For 10 years, it rarely missed earnings estimates, growing at double-digits no matter what.

But it turned out GE’s incredible earnings reliability was a facade. Welch had turned it into a financial house of cards that moved money around to paper over any weakness in earnings.

The company moved future profits forward to ensure GE rarely missed expectations and kept delivering an incredible growth rate.

But that caught up with the company when the financial crisis struck in 2008. GE needed a $3 billion bailout from Warren Buffett and two dividend cuts totaling 70% to survive.

Jeffrey Immelt, who succeeded Welch, tried to return to the company’s roots by making some splashy acquisitions. But just five years later, GE wrote down $22 billion in acquisitions Immelt made, the company’s admission it had grossly overpaid.

GE went from a dividend aristocrat in 2000 to cutting its dividend five times in the last 22 years. Each dividend cut was an admission by management that the thesis was broken and a good time to sell.

Now, what if you had just held onto your GE shares, hoping and praying for it to finally recover?

Well, it wouldn’t have been all bad… Every $1 invested became $7.7, adjusted for inflation. That’s more than 2X better than the S&P 500.

But investors who cut their losses on GE after the first round of dividend cuts in 2008 and put the money into a comparable play did much better.

Honeywell is an industrial conglomerate that Morningstar calls “the best run in the world.” Unlike GE, it never tried to diversify outside its circle of competence. It’s always stuck to its knitting, and investors have prospered as a result.

Source: Portfolio Visualizer Premium

Thirteen years after replacing the failed dividend aristocrat GE with world-beater Honeywell, investors would have earned 50% more inflation-adjusted wealth.

Why Today Is a Great Time to Sell the Duds

Back to the story about my father, who had lost 40% of his retirement fund…

I helped rescue his 401K by applying a very simple investing lesson: You don’t have to make back your losses with the same companies.

Here’s how we rescued my father’s retirement dreams…

We sold Alibaba and replaced it with Amazon, Autodesk, Lowe’s, and Mastercard. These are four Ultra SWAN (sleep well at night) blue chips that are faster growing and safer than BABA.

He now has a 93% probability of retiring on schedule in 10 years.

This shows that when you make room for the best blue-chip stocks and can buy them at great valuations, you can fix your past mistakes.

Historically, after bear markets like this one, the S&P delivers 3X to 3.3X returns over the next 10 years. Individual blue chips can deliver 6X to 13X returns.

Plenty of world-class companies can save your retirement even if you’re down 50%, 60%, or 70% in companies whose fundamentals have collapsed.

That’s what Wide Moat Research has helped many investors accomplish in bull and bear markets. Not through miracles, hopes, and prayers but through the world’s best blue-chip bargains.

To get details on other blue-chip stocks that could rescue your own retirement, click here to learn more.

Safe Investing,

Adam Galas
Analyst, Intelligent Income Daily