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Investment Analysis Clubs / The BMW Method

URL:  http://boards.fool.com/the-stop-loss-order-is-in-my-opinion-quite-the-30254878.aspx

Subject:  Re: A learning curve Date:  9/10/2012  6:54 PM
Author:  kelbon Number:  40706 of 41629

The stop-loss order is, in my opinion, quite the double-edged sword. It's just as easy to inflict damage on yourself as effectively use it as a productive tool.

Unless you have nerves of steel and can completely clamp down your emotions it's almost inevitable that the twins of greed and fear will inform your decisions as to when to instigate a stop-loss order, and at what price.

Hindsight, as they say, is twenty-twenty. How many of us wished we'd had stop-loss orders in place when the market plunged in the fall of '08? This having been a wise move; a big money saver, was however contingent on having the where-with-all to get back into the market at, more or less, the right time, when fear was at its height — much easier said than done for most people.

The reality is, nobody really knows when a stock goes down 15% whether this is a bottom, or the beginning of a slide to a 50% loss, or more. It's a sickening feeling to sell, taking a 15% loss, only to see the stock recover in short order.

Experience shows that it's quite possible to have a 50% + loss on a stock and then see it thrive again further down the road. On the other hand, positions sometimes go to zero. You win some and you lose some. Aside from either enormous luck and/or talent, this is the nature of the stock market. Warren Buffett has said that if you can't stand to see a stock go down 50% you shouldn't be in the market in the first place. Presumably he meant that it's probably going to happen to you sooner or later so you better have the stomach for it when it does.

The only time I used a stop loss order was when I had a stock that doubled from my purchase price in just over a year. It kept going up, but was, in my opinion, over priced and primed for a fall. Let's say I bought it a $20. When it got to $42 I put in a stop-loss order for $40. It got as high as about $44 and then started down. The stop-loss order was triggered at $40 and the stock continued down, down, down. I was happy to take my profits. If I hadn't put in the stop-loss order I doubt I would of had the gumption to sell at $40. I'd taken that decision out of my hands before it happened.

Although I wish I'd used stop-loss orders on some losers, I've had an equal amount of losers that morphed back into winners, so, all in all, with stop loss orders I probably wouldn't have been ahead in the end. I'm more comfortable with stock-loss orders when I'm fairly sure that a stock is over-priced and I have a good profit margin locked in. It's frustrating to lose out on an even higher stock price in such circumstances, but that's greed talking.

kelbon
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