In his book "Championship Fighting: Explosive Punching and Aggressive Defense" (1950), the late heavyweight boxing champion Jack Dempsey asked, "What would happen if a year-old baby fell from a fourth-floor window onto the head of a burly truck driver standing on the sidewalk?
"It's practically certain that the truckman would be knocked unconscious," Dempsey noted. "He might die of brain concussion or a broken neck."
Dempsey's observations lead me to two conclusions: 1) The champ would have made a horrible babysitter; and 2) It might be wise for burly truck drivers to steer clear of the "Octomom" over the next few months.
Of course, the point behind Dempsey's unique twist on Galileo Galilei's famous experiments was to emphasize the main point of the boxer's tome, mainly that extreme force, otherwise known as a good offense, is also the best defense. It is a concept as important to investors today as it was to pugilists of yesteryear.
Lessons from GM
In these times of near-constant market turmoil, Dempsey's belief in an "aggressive defense" certainly makes sense. Consider the case of General Motors (OTC:GMGMQ). One didn't exactly need to be an expert at reading tea leaves to understand that the company was in financial trouble long before it ultimately declared bankruptcy.
A recent Reuters' report pointed out that, as early as October of 2008, GM and Chrysler were in merger talks and planning to cut jobs and close plants, as auto sales continued to slide. Yet many investors, either out of apathy or a sense of optimism more compelling than Anthony Robbins on laughing gas, refused to acknowledge the writing on the wall, which spelled "sell" in big red letters - presumably in blood. True, by that time, General Motors' stock had already lost nearly 80% of its equity value over the past year and battered stockholders were undoubtedly hoping for a rebound. But hope doesn't protect one from falling babies, does it? (You might want to check out Why do some mergers and acquisitions fall through?)
A New Day Dawns
In 338 BC, after fleeing the battlefield in a confrontation with Macedonia, Athenian orator and statesman Demosthenes responded to accusations of cowardice by saying, "The man who runs away may fight again."
Although Demosthenes would probably not be a fan favorite at UFC 99, he does make a good point. GM closed at 87 cents on Friday, June 6, down another 85% since the end of October. Those with the courage to cut their losses, back then, at least have some money to invest in other, more promising companies today.
How to be an "offensive" investor:
1. Monitor your holdings more or less often as stock/economic conditions warrant.
2. In the event of bad news, consider its impact on the business. Is the news likely to have a short- or long-term effect. More importantly, will the information affect the company's fundamentals - and for how long. Remember, it is better to spot a stock going sour sooner rather than later. (Learn more in our Fundamental Analysis Tutorial.)
3. When evaluating your positions, ask yourself whether you would buy the issue again today. If the answer is no, it might be time to sell.