Danger Of Using "Stop Loss"

[CityFarmer]

CityFarmer,

I like your answer

"I value a stock base on fundamentals, and buy-and-sell still base on quoted price from SGX. It happens that both are using the same unit, the $. "


1. Using "I" speaks volumes. You speak from your own perspective and personal experience. That's sharing.

2. "We value investors" - it's like saying all Singaporeans like chilli. (Hey, no one made you Indian chief. Speak for yourself, LOL!)

3. Stop-loss is just a risk management tool. Nothing more nothing less. Sometimes it's also known as: capitulation, throwing in the towel, closing your brokerage account, etc.

4. It's a pity no one shared their ALTERNATIVE risk management techniques if they do not use stop-loss. No one wants to protect the downside?


A gentle poke to "we value investors":
------------------------------------
Q: Do you use stop-loss?

A: No. We value investors don't use stop-loss one (in a very look me down tone).


Q: So what other risk management techniques do you use?

A: Huh? Pause..... Oh! I call myself a value investor!


(Don't hit the face!)

I used "I" because your question used "Do you..?" I hope my English served me well.

There is a commonly used risk management technique for value investors, the famous Margin of Safety (MOS). It is so common that, we will not even name it in our discussion, unless requested.

[smallcaps]

CityFarmer,

I like your answer

"I value a stock base on fundamentals, and buy-and-sell still base on quoted price from SGX. It happens that both are using the same unit, the $. "


1. Using "I" speaks volumes. You speak from your own perspective and personal experience. That's sharing.

2. "We value investors" - it's like saying all Singaporeans like chilli. (Hey, no one made you Indian chief. Speak for yourself, LOL!)

3. Stop-loss is just a risk management tool. Nothing more nothing less. Sometimes it's also known as: capitulation, throwing in the towel, closing your brokerage account, etc.

4. It's a pity no one shared their ALTERNATIVE risk management techniques if they do not use stop-loss. No one wants to protect the downside?


A gentle poke to "we value investors":
------------------------------------
Q: Do you use stop-loss?

A: No. We value investors don't use stop-loss one (in a very look me down tone).


Q: So what other risk management techniques do you use?

A: Huh? Pause..... Oh! I call myself a value investor!


(Don't hit the face!)

Ok got use lah. Use 0% and 100% stop loss. That way, risk is 'managed' without interfering with value principles...and no need to crack brain to upfront guess an optimal stop loss %.

[Jared Seah]

Knowing what you invest in is also a good risk management

Same for those aggregate investors that limit their single position to max 1% of their portfolio. A 100% loss on a single position is "merely" a 1% loss at portfolio level. That is another risk management technique as alternative to using stop-loss.

http://singaporemanofleisure.blogspot.sg...-of-2.html

There are many ways to reach Rome

[CityFarmer]

Knowing what you invest in is also a good risk management

Same for those aggregate investors that limit their single position to max 1% of their portfolio. A 100% loss on a single position is "merely" a 1% loss at portfolio level. That is another risk management technique as alternative to using stop-loss.

http://singaporemanofleisure.blogspot.sg...-of-2.html

There are many ways to reach Rome

Fully agree on "many ways to reach Rome". I prefer FA, but I will not dismiss other methods e.g. TA. There are successful investors with TA, and should has its merits.

One important note is, we should follow a method as a package, rather than selected parts of it.

[Temperament]

What is in actual practice?
Let's say you want to sell 20 lots of SPH now, how you go about it?
You sell all 20 lots in one go or slowly?
Do you take current Market's sentiment and global economic climate into consideration?
How do you use trading tools to do it? - Auto stop loss, trailing stop loss or limit order.?
i have yet to learn what's the best way.

no best way. aim for the average. and be happy with the results.
no point trying to buy 1 cents cheaper or sell 1 cents higher..
More important is your idea and position. does it really matter if you earn 90% or 110% on a 1 bagger?

Ha! Ha!
Silly me. i would have found EL DORADO if there is a best way.
Anyway, i always use pyramid down or up buying or selling.
Very rare i sell or buy at one go.
i do this as i can't be sure what's the next change in the market.
So long make money, or don't lose money is already happy lah.

[smallcaps]

Juz ran some numbers on my own past transactions from Mar 2004 to present, to test whether stop loss would have added any value to my own portfolio, which usually contains 1 to 5 stocks:

71 sell transactions
16 were at a loss
Total value of loss transactions = 1.2% of total sell transactions value

At least for me, it does not seem important to try to bring down this small loss % with any other mechanisms other than the ones that comes built into value investments, especially if not even sure adding stop losses would have helped (or made it worse).

[opmi]

trying to time entry levels is tactical. stock selection is strategic (lack of a better word).

get the stock selection right, entry/exit levels should not make much difference.

in fact, trying to be too smart (kay kiang) by timing entry/exit prices may fall into psychological trap of "anchoring"

If you are going for 8% p.a. type of return (from stock selection), then 1-2% make a big difference.
For value investing, 50% MOS implied 100% return. So what is 1-2% or even 5-10%?

"Kiang tio ho, mai kay kiang" - Hokkien

[fat al]

A gentle poke to "we value investors":
------------------------------------
Q: Do you use stop-loss?

A: No. We value investors don't use stop-loss one (in a very look me down tone).


Q: So what other risk management techniques do you use?

A: Huh? Pause..... Oh! I call myself a value investor!

No lah, I don't think there is a "look me down tone" in not using auto stop loss. Problem is that it is difficult to reconcile auto stop loss with value investing.

Eg as Warren Buffett says, "Be greedy when others are fearful and fearful when others are greedy."
Auto stop loss is akin to "Be fearful when others are fearful"

IMHO, put options may be more appropriate. If a stock plummets, investor can sell both his stocks and put options to control his loss. However, if he is of the view that it is just temporary market volatility (ie voting machine at play rather than weighing machine), he can just sell his options at a profit but maintain his long stock position to ride on future gains. Options may be expensive though and not available all the time.

Perhaps, auto stop loss is more useful in day trading or technical/charting types of investment.

[Temperament]

Quote
"get the stock selection right, entry/exit levels should not make much difference"
Unquote

Hah!
What about this author's thoughts:-

2) Assets allocation & Purchase price entry level.
There’s nothing you can do better to control Risks and generate Profit by proper Allocation of Assets and buying those assets at the Right Price.
Right Price
{“When” is more important than “What”.
In most cases, when you buy is more important than what you buy. You can make money on the most marginal company if you buy it at the right time; you can lose money in the bluest of blue chips if you buy it at the wrong time.
The right time is when a stock is selling reasonably near the low end of its trading range or at a historically low price/earnings multiple, or when any trustworthy guideline indicates a sharp reduction in risk. This low entry level provides a safety net dangerously missing at higher prices.
The wrong time to buy for a long-term investor is when a stock is selling near the high end of its trading range. Everything depends on the price you pay, regardless how gilt-edge the stock.}
Unquote
NB:
For value investors we are all trying to buy anything at a price that we think is value for our money. It doesn't matter when. Is when really more important than what in the stock market, as ascertained by this author?
I tend to agree though i would like to pick the right stock too. The right stock means even if i don't make money, i still survive.
What say you? What did you say?

[opmi]

Investing will come too difficult if add the 'timing' element into investment process.

keep it simple by taking out the 3 considerations out of investing:

- timing the market - focus only on MOS and valuation. entry levels dont matter if MOS fat fat.
- investment holding period - can hold forever until facts change. if MOS fat fat, 100% in 5 years = 15.5% pa.
- treat invested capital as 100% loss - so lose money also within expectations. But limit bet size.

Professional OPM fund mgrs cannot do above coz will lose jobs or clients before investment pan out.

Knows an old timer private investor who can do the 3 things above. Doing very well.