When should you lock in gains and cut losses in stock investing? Such a question can only be answered based on your understanding of what stocks are and how to buy or sell them.

One good way of understanding this aspect is to use the ‘Be-Do-Have’ Principle made popular by American author, salesman and motivational speaker, Zig Ziglar.

In essence, the principle places primary focus on the being, whereas the doing is secondary to what results we intend to have. But how does one apply this principle? Read on to learn more.

Be: viewing stocks as businesses

If wealth is all about income productivity for the long-term, then business should exist (the be) to add value to communities.

This then makes it meaningful to own shares in such companies and thus streamlines your goal as an investor to view the stock market as a marketplace to buy or sell these businesses.

Do: own and accumulate shares

When you view stock investments as a marketplace to buy and sell businesses, you will naturally study a stock’s business model, financial strength, plans to sustain future growth and calculate its valuation ratios. Why?

This is because your decision (the do) to buy, hold or sell a stock is now based on its income productivity for the long-term (as mentioned in the above section).

For instance, if a stock is involved in businesses that produce excellent products and services that add value to people’s lives and are efficient in producing great profits and cash flows year-after-year, you will seek to own it for life.

Have: productive businesses with healthy gains

If you abide by the above two points of the ‘Be-Do-Have’ Principle, you will naturally develop a portfolio that is filled with highly productive businesses. Thus, you will collect recurring dividends as these businesses continue to generate sales, profits, and operating cash flows over time.

As a result, you will probably achieve (the have) larger capital gains and incur smaller capital losses, as you would have bought stocks for cheap considering that your decisions were guided by calculation of valuation ratios.

In contrast, let’s take a look at some common beliefs and perceptions on stocks and how they affect investment decisions. These are more apparent with traders, speculators, and gamblers (TSG) in the stock market.

What’s more, you can also use this as a checklist to reflect on your beliefs about stocks and about wealth at large.

Be

Is wealth about having more money (tomorrow) than what you have (today)? Would it be better to have more money (today) than to have it (tomorrow)?

The first question is about the quantity of money, while the second question focuses on the speed to increase the quantity of money.

Hence, if your answers to the two questions above are ‘yeses’, then, what could your real objectives be for investing into the stock market? Could it be to make quick cash? If that is the case, then, ‘money’ itself is your main objective.

Do

Most new investors either buy stocks which they think will go up in prices, or sell stocks which they feel will come down in prices in the future. Why?

This is simply because most new investors seek to make more money in the short-term. Hence, traders use trading tools to help them to do the above efficiently. Meanwhile, a speculator or a gambler could buy or sell stocks based on their emotional state.

Have

So, how do you fare thus far in the stock market? Did you make or lose money quickly in the stock market? If you have been successful in making money fast as a TSG, great, you may continue doing what you are doing now.

But, if you are not getting the results that you desire, then, it is helpful to start reflecting upon what you think and believe about the stock market and wealth, in general.

So, the answer of when to lock in gains and cut losses actually lies in how you view yourself today; are you a businessman or are you part of the TSG group? What is the definition of wealth to you?

Remember, a businessman may buy or sell a stock based on its income productivity, whereas a TSG goes by gut feel. The latter operates solely to make quick gains on stock prices. Therefore, who are you inherently: a businessman or a TSG?

This article first appeared in kclau.com.

KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the first online personal finance course specifically designed for Malaysians, entitled the Money Automation System. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.