Danger Of Using "Stop Loss"

[Jared Seah]

CityFarmer,

I have a very stupid question.

When you buy and sell equities, do you use the quoted prices by SGX?

I am only aware of:

Price is what we pay; value is what we get

I can't seem to find quoted values anywhere

[money]

It is not a useless tool. It is a contingency tool that most of us hope we never have to use. Putting a stop loss does not mean we hope it will trigger. As much as we try to avoid making investment mistakes, they do happen. A stop loss just prevents our investment mistakes from losing us too much money. Does that help or hinder us in any way when the point is to TRY not to lose any money at all.

how about you bought a stock at 50cents, put a stop loss at 40cents, the market is volatile so your stock fell from 50 cents to 35 cents, you glee at losing less money. You hope it falls further.

Unfortunately, it slowly creeps back to 40 cents. You pray hard it falls further. Disappointment sets in as it starts creeing higher, higher and higher to 45 cents. Are you going to kick yourself for not buying at 35 cents? Or should you feel stupid setting a stop loss at 40 cents?

The idea of setting stop losses to cut loss sounds plausible but it comes with an assumption that the stock will continue to fall and fall. It also comes with the assumption that you can buy below your stop loss price, which is not always true. It also comes with the assumption that momentum investing is a smart thing to do.

[Clement]

CityFarmer,

I have a very stupid question.

When you buy and sell equities, do you use the quoted prices by SGX?

I am only aware of:

Price is what we pay; value is what we get

I can't seem to find quoted values anywhere

Well, the prices are not generated randomly are they or do we assume we are the only rational people around? If there is heavy selling it means someone out there has a contrary opinion right? Markets work both ways, you buy in, someone sells out. Who got the short end of the stick? Only time will tell.

[BlueKelah]

stop loss is a trading tool which will come under a lot of fire here on a value investing forum.

it is not useful at all for us because in a falling market or a stock, more and more value comes out. so a stock deemed undervalued will be even more undervalued if there is a sudden drop in price. This is where the value investor with his cash hoard or warren's elephant gun does another buy in.

in most cases the cash pile or other net assets in good companies which we pay 50cent for a dollar will be enough to buffer a market crash or downturn

[Temperament]

CityFarmer,

I have a very stupid question.

When you buy and sell equities, do you use the quoted prices by SGX?

I am only aware of:

Price is what we pay; value is what we get

I can't seem to find quoted values anywhere

Well, the prices are not generated randomly are they or do we assume we are the only rational people around? If there is heavy selling it means someone out there has a contrary opinion right? Markets work both ways, you buy in, someone sells out. Who got the short end of the stick? Only time will tell.

Exactly, until today i still have to understand why in a black swan event, why there are so many willing buyers; till the day there are so little sellers and buyers.

[NTL]

I think stop loss using at buy price may not have any meaning here. But how about at point of taking profit?

Say, ABC was bought at 50c, which was assessed to have a value of $1. It has run up to $1.20 now. Not knowing whether it will go up further, or drop back, isn't a "stop loss" be useful here if it is set at $1.10?

[Clement]

It is not a useless tool. It is a contingency tool that most of us hope we never have to use. Putting a stop loss does not mean we hope it will trigger. As much as we try to avoid making investment mistakes, they do happen. A stop loss just prevents our investment mistakes from losing us too much money. Does that help or hinder us in any way when the point is to TRY not to lose any money at all.

how about you bought a stock at 50cents, put a stop loss at 40cents, the market is volatile so your stock fell from 50 cents to 35 cents, you glee at losing less money. You hope it falls further.

Unfortunately, it slowly creeps back to 40 cents. You pray hard it falls further. Disappointment sets in as it starts creeing higher, higher and higher to 45 cents. Are you going to kick yourself for not buying at 35 cents? Or should you feel stupid setting a stop loss at 40 cents?

The idea of setting stop losses to cut loss sounds plausible but it comes with an assumption that the stock will continue to fall and fall. It also comes with the assumption that you can buy below your stop loss price, which is not always true. It also comes with the assumption that momentum investing is a smart thing to do.

I don't know why everyone seems so offended by a risk management tool. In this example, is the mistake to put the stop loss? Or to not reinvest after realizing the original thesis is sound and original assumptions hold up. No one is suggesting momentum trading. It just gives the investor the chance to re-evaluate and incorporate any new information without exposing himself to further losses.

[cif5000]

I don't know lah. Does stop loss really stop the losses? No right? Lose money means lose money. Win money means win money. Why not "take loss" and "stop profit"? Strange right? Speak hokkien better. English so leychey.

[BlueKelah]

there is also the possibility of big boys triggering your stop loss then pushing the price back up just ask any of the guys who have been around with more experience than me...

STOP LOSS is an IMAGINARY risk management tool, In reality it is just another variation of the simple buy and sell. in actual fact you are not STOPPINg your loss. You are just Selling at a lower price, only its in an automatic fashion. in fact if you follow this example of 40cent sell and 35cent buy back it just looks like a short sale of your own shares! its like the stock goes down 20% and you get a sell signal and start your short sale covering at 35 cents.

[CityFarmer]

It is not a useless tool. It is a contingency tool that most of us hope we never have to use. Putting a stop loss does not mean we hope it will trigger. As much as we try to avoid making investment mistakes, they do happen. A stop loss just prevents our investment mistakes from losing us too much money. Does that help or hinder us in any way when the point is to TRY not to lose any money at all.

IMO, the tool is not useful for value investors. Value investors focus on value, than price, but "stop-loss" works on price alone.

True. However price is not useless as it is the market's best estimate of it's current value. We might have a different opinion but I think it is unwise to discard the market view entirely. The question is how sure are we that we have covered all the bases and found value and how large of a loss do we face if we are found to be wrong. After a certain point, I think it is wise to stop and re-examine our thesis again and a stop loss enables us to do so without exposing us to further losses. If we find it satisfactory, we can always buy back in.

I do agree market price is the offer for the value. Focus on value doesn't mean ignoring market price totally. It just means valuing the stock base fundamentals, instead on price movement. Dispose stock upon "stop-loss" is valuing stock solely base on market price.

Your strategy relies on timing the market, which is difficult, if not impossible for a reliable result over long term.

---

CityFarmer,

I have a very stupid question.

When you buy and sell equities, do you use the quoted prices by SGX?

I am only aware of:

Price is what we pay; value is what we get

I can't seem to find quoted values anywhere

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 $.