My philosophy is that all stocks are bad. There are no good stocks unless they go up in price. If they go down instead, you have to cut your losses fast. The secret for winning in the stock market does not include being right all the time. In fact, you should be able to win even if you are right only half the time. The key is to lose the least amount of money possible when you are wrong. I make it a rule never to lose more than a maximum of 7 percent on any stock I buy. If a stock drops 7 percent below my purchase price, I will automatically sell it at the market—no second-guessing, no hesitation.

Some people say, "I can't sell that stock because I'd be taking a loss." If the stock is below the price you paid for it, selling doesn't give you the loss; you already have it. Letting losses run is the most serious mistake made by most investors. The public doesn't really understand the philosophy of cutting losses quickly. If you don't have a rule like cutting a loss at 7 percent, then in bear markets like 1973-1974, you can lose 70 or 80 percent on your holdings. I have seen people go bankrupt in that type of situation. If you aren't willing to cut your losses short, then you probably should not buy stocks. Would you drive your car without brakes?

—William O'Neil