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CAPS / Lessons from CAPS
|Subject: Re: Protecting your Downside with a Stop Loss||Date: 10/8/2007 10:32 AM|
|Author: HelicalZz||Number: 68 of 187|
This is by no means sage advice - but I can comment on how I've used stop losses.
First, note that while Buffet's 'Rulez' get quoted a lot, he also comments that investors have to be willing to accept and expect their holdings to drop in value from time to time (don't have a quote).
So, stop losses.
Rule #1 (kidding) - Don't use them when you buy a stock.
If you don't want to buy more of the stock when it gets cheaper - then why are you buying it now? Expect your stocks to go up and down - it is reality. This past summer was a good psychological shake out for investors IMO, and I'm certainly glad I didn't have stop losses on my holdings.
I will occasionally use them when I think a stock has gotten a bit rich in valuation, at least for a portion of my holding in the stock. If I've had a nice run in a stock, and certainly wouldn't be adding at the current price, I might set a stop loss for 1/3 or 1/2 of the position to insure I don't give back those gains. You never know how irrational the market will get with a holding, so I hesitate to sell outright (unless really compelled by another investment). I don't tend to set them too tightly (at least 10% off the current price) since everything goes up and down. Pay attention to tax consequences - having to pay short term capital gains taxes to avoid a potentially temporary price dip rarely makes much sense.
So don't try to use them to protect downside (they often simply insure downside when you do that).
Perhaps use them occasionally to to lock in gains, especially when you think the stock price may have overreached in the short term.
Zz - I don't have any stop-losses currently in place.
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