Danger Of Using "Stop Loss"

Do you use stop loss?Auto or manual stop loss?

What kind of stop loss?
SCB every day set the stop loss?
SMS alert to you. Then you log into your broker to sell?
Auto stop loss?
Every day end of day you check the price. If need to sell, tomorrow sell out at open stop loss?

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Trailing stop loss for myself

I think for most forummers here dont use stop loss. If there is a drop of 10%, and the company is fair value/undervalue, I think most forummers would buy more instead of selling.

(08-09-2014, 03:50 PM)Breadman25 Wrote: I think for most forummers here dont use stop loss. If there is a drop of 10%, and the company is fair value/undervalue, I think most forummers would buy more instead of selling.

that is average down

Only manually at the highest level. Which is to stop myself before buy into a stock that does not have a high enough probability of eventually giving an adequate return on investment. A.k.a itchy fingers

(08-09-2014, 07:21 PM)wahkao Wrote:

(08-09-2014, 03:50 PM)Breadman25 Wrote: I think for most forummers here dont use stop loss. If there is a drop of 10%, and the company is fair value/undervalue, I think most forummers would buy more instead of selling.

that is average down

It depends on the definition of stop-loss. If the definition is "risk management", then value investor did it proactively, by having sufficient MOS.

If the definition is "cut losses", then maybe those previous "stop-loses" posted are not actually "stop-loss", but some thing else

Just to share my recent thinking on this topic via quantitative approach.

I am not setting Stop loss for individual counters which are normally volatile, esp small caps, but maybe it is meaningful to have trailing stop gain/loss point for the entire portfolio value. Firstly, I try to record and estimate the mean and standard deviation of monthly portfolio gain/loss, lets say 2.3%, 3.1% respectively. Secondly, by assuming the gains are normally distributed, establish the black swan event likelihood, lets say 2 standard deviation from the mean, or having a Loss more than 3.9% (2.3-3.1*2) in that month. The probability for this to happen is as small as 2.3%. (very unlikely to happen for a well diversified value portfolio in a bull market.) If it does happen, I believe it is a strong indication of a market turning point.

The critical question is whether the "one month" benchmark is too short or too long, and it depends on personal preference. IF we use 3-months mean and standard deviation of monthly portfolio gain/loss, the standard deviation will be much smaller and mean remains the same as that of one month. That means the stop criteria is more stringent in percentage term , but having less false alarms as the time frame is much longer (one need to wait until the end of the 3-months period to calculated the mean for the previous 3-months). "3-months" benchmark gives less frequent and more accurate signals, but the loss incurred during a real bear market may be much bigger than "1-month" benchmark.

In addition, other indicators may also be used to confirm or disproof the above stop loss signal, but that will be another big topic. Fire alarm system is a useful analogy.

No need to stop loss as always prepared for corrections/black swans/recessions with cash to buy in.

Price down just hold and wait and happily collect dividends

(08-09-2014, 07:21 PM)wahkao Wrote: that is average down

Yes, you are right. A friend who trades buy a stock that has drop 10%. And he told me its call averaging down. But for me, when a stock drop 10%, its just present me an opportunity to buy more. The stock has gotten "cheaper" and a much bigger Margin of Safety. For me, there must be a reason for me to buy.

I have merged the thread into an existing thread, which discussed exactly the same topic.

Please don't start new thread, if there is existing thread.

Thanks

Regards
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