The MF has recently published some quotes and motto's from Warren Buffet about his #1 rule of investing.....never lose money and his #2 rule of investing.....always follow rule #1. I think this is a very simple but powerful concept when you consider that if you lose 50% on an investment you need to find another investment that provides a 100% return before you break even.When investing new money does anyone have any books, articles, strategies, or thoughts to suggest on how to use Stop Loss' to prevent you from losing money?I know many people say that Stop Loss's will simply result in getting stopped out of good stocks on bad days and that if you buy stocks with an appropriate margin of safety over the long term you shouldn't worry about a short term loss. While I understand you need to buy for the long term I also know that many companies that look like strong long term investments don't work out and you end up breaking Buffet's #1 rule.That said, I'm hoping some of the more experienced investors in the MF community can give me some sage advice on the use of Stop Loss's to protect on the downside and how to buy back in if you get stopped out of a stock that you still want to own long term.Also, I know you can always dollar cost average but I tend to invest in chunks not systematically with equal dollar amounts so any buying strategies with downside protection ideas would be greatly appreciated.Thanks,Chris
Chris,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.
Thanks Zz....sound advice!
I recently tried stops for the first time. I placed them for TPX, MSA, and BWLD at around 10% below current prices, mainly to protect the big gains I had made. I got stopped out of all 3 and am already starting to feel like it was a mistake ...
dear chris I trade on scottrade but other discount brokers allow the same thing now. Its called a trailing stop loss. or called Trailing stop on scottrade's platform that I USE. Basically a trailing stop loss works better because less say I place a stop loss on LLY. Lily it goes up 7 pts one day. I was at work didn't check my stock when I got off. Bad mouse. I was smart enough however to lock in profits with A trailing stop loss. Because I set the trailing stop loss to trail by one dollar that price falls from 7pts to 6pts I locked in five dollars profit. but now the stock jumps after falling a dollar another two points that equals another two dollars profit. I lost that profit because the stop loss timed in. So set the loss according to can I number one afford a one dollar loss to make room for a three dollar gain. because had I set the trailing stop loss at 2pts. I would of still made the orignal 6pts profit. taken the two point fall. then gained the three for a profit of 7-2=5=3 pts=8 pts. so I ended up 8pts ahead and still in the game because I still own the stock and the I can market out if the profit is high enough are ride it like a smart fool and set another trailing stop for how many dollars i can afford to lose verses a up swing . That how a better stop loss works called a trailing stop loss. I would never use the normal one. Too much profit loss that way.
regarding the comment If you want to buy the stock when it's cheaper why buy now. because that could be a indication of a profitable temp. downswing. Chris question I read our investment ideas. They sound very sound and wise. You know what a limit order is? This order allows you to get the stock at a set price when the stock hits that price no risk involved but you must temporary accept one days downside risk doing this. So buy a now selling 10 dollar a share at 7 because it charts well and the MACD and all the research you and I both use says okay this stock fell two pts today looks hmm like it will fall again. So you say its at 8 I'm beting 7 maybe 6. But then back up to say 12 are 13. Yes we want in at 6, but changes of getting it with high volume not likely. At 7 more likely we place at 7 we get that price. happy days. the stock piles high to 12. we made money. sad day it falls to 5 we get the stock at 5 if the order was not done at 7. High volume day likely it falls too quickly to excute the order we get it at 5, next day we are proven right. even at 7 we lose on paper two pts. before the 12 or 13 that we want. safe second way of getting a bargin limit orders.
The market is volatile lately and (according to those who should know) likely to stay that way and even get more so. In a volatile environment, stop-losses can kill... I've taken a flogging lately with things like prices whipping around on opening enough to stop me out (stop-losses set 5% away from the buy-in price) and lose serious gains for me. I'm on a net loss due almost entirely to this factor. So I'm moving to using options to hedge my buys instead of using stop-losses. Put options for long positions, call options for short, right at the money. All the upside, none of the downside.
The two times I've forgotten to set stop losses, I really regretted it. I'm talking about LDK Solar and Wellcare. I keep the Wellcare option at -98.95 on the screen just to remind myself: A: Don't buy too many stocks, too hard to keep track of them all.B: Set a stop loss at -15% on options -8% on stocks.You can always buy back in.Yesterday, for example, I was stopped out of STP at -15%, today I bought it back at $50 less.
I buy only stocks that I intend to hold long term; dividend payers with dividends reinvested.I routinely set a trailing stop loss 15% below buy-in for 1/2 the shares bought and a regular stop on the other half at the same level. This insures I will not be stopped out on less than 15% dip but will follow my gains and lock in at least 1/2 of those gains on a large down turn. I then have cash to buy back in at a lower price.This has worked well for me on several occasions.Not participating in a rise due to stops is not a loss, it is a missed opportunity but the same can be said for thousands of investments you don't own. A LOSS is a real money missing from your pocket; don't confuse the two.Don
I'll second what Helicalz said but I will say I find stop losses to be most useful on risky shorts. A couple key stops helped keep me from being really crushed a couple times while I was away at work.
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