This is Not What You Want to Hear

"When stocks do recover it will be the smaller companies that will offer up the biggest gains. These will be in the double and triple digits, and it will be hard to not make money if you own shares of solid small companies. But you can't wait until the market gives the 'all clear' sign – because it will never come."

I wrote the above comment in early October 2011 at a time when the market looked like a sinking ship. At the time many investors didn't want to buy stocks, preferring to either sell or just hold.

With a good bit of luck, it's proven to be very accurate. It has been hard not to make money recently with stocks, and small cap stocks have led the charge.

Those of you who bought when many others were selling this past fall deserve a big pat on the back.

Since the beginning of 2012 we've seen all stocks rally. But in particular, it's been the small and micro-cap stocks that have surged the most. In particular, the 'low quality' stocks – those without positive earnings – have done the best.

I think it's safe to say most investors can let out a sigh of relief right now that positive paper gains are back. We've had a nice run, we're up on our stocks – life is good.

But the good times won't last forever. Even though optimism seems to be spreading, I urge you to lock in some gains right now. Again, from my October letter:

"Remember that our long term strategy for success means buying stocks when they are cheap and selling when they are expensive, or when we have gains. I urge you to stick by this strategy – it works."

Nobody wants to believe right now that their gains are going to evaporate. But they could. I'm not predicting that the market will collapse. I'm not saying that stocks are universally expensive or that you should be fearful.

It's just a plea not to get greedy.

Lock in some profits now to ensure they don't disappear. If you own 10 stocks, sell one. If you own 20, sell 2.

Sell the ones you weren't sure you really wanted to buy to begin with but did anyway (every investor does this, so you're not the exception). Right now is your opportunity to step back and reassess.

As my friend and fellow editor Andy Crowder constantly says, "Remember that cash is a position."

In our small cap service I recently executed the above strategy by recommending subscribers sell Liquidity Services (Nasdaq:LQDT) for a 41% gain and OYO Geospace (Nasdaq:OYOG) for a 21.4% gain in 7 months and 9 months, respectively.

There is nothing wrong with these companies – in fact I like them both. But both are also near the top end of their trading ranges – just like the broad market.

And I'd rather lock in the profits a little early than risk watching them evaporate because at some point the news cycle – and the market – is going to change directions. Better to kick yourself with extra money in your pocket.

I want to make it clear that I am still holding the vast majority of stocks and recommending that subscribers do the same. But bullishness is very contagious and when it spreads too far, as it has early in 2012, I get a little nervous.

Locking in profits helps me sleep better. And consistently good sleep is a pretty accurate reflection of a well balanced investing strategy.

So right now, take a little of the table. Sit back, review a few companies you wish you had purchased but didn't. And get ready to invest your positive gains in those companies when the right price comes to you.