Danger Of Using "Stop Loss"

[BlueKelah]

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?

NTL that kind of "stop loss" method is called trailing stop in trader language, its a strategy for following a share up up up. the converse argument that in the long run, if the share were to dip to $1.10 and go back up to $2, what then? your stop loss would have stopped some of your potential gains as well.

For value investing we would look at the value at the $1.20 price. if the ABC is worth $2 now, it is still undervalued. If no other more attractive investments we can continue to hold on to the same stock

[Clement]

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.

Like I have said at the start, a computerized stop loss is a way to enforce a risk management strategy for those who may not have the discipline or availability to do so manually. I really have no idea how it became so controversial. You are correct in that assessment of the "short sale." However, the intention of such rules was not as a trading tool but just risk management and the repurchase is subject to a re-examination of the original investment thesis and not subject to the price stabilizing or continuing to fall. I am not advocating any actual short selling at the stop loss prices or anything of that sort.

[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?

NTL that kind of "stop loss" method is called trailing stop in trader language, its a strategy for following a share up up up. the converse argument that in the long run, if the share were to dip to $1.10 and go back up to $2, what then? your stop loss would have stopped some of your potential gains as well.

For value investing we would look at the value at the $1.20 price. if the ABC is worth $2 now, it is still undervalued. If no other more attractive investments we can continue to hold on to the same stock

Thanks for the explanation. I only know how to buy, then sell. What term there is I truly don't know.

What I mean is the assessed value of ABC is still $1. So at $1.20, it is already considered overvalue.

[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.

[money]

Traders, brokers and remisiers will find 1001 reasons for "stop loss". Just like in the days of tulip speculation, there will never be a shortage of reasons.

Have read quite a few books on warren buffett, but have never heard him discussing "stop loss".

Dont think a value investor should bother thinking about it.

[Aldar]

A value investor will only sell if:

- the value has been realised
- upon re-evaluation, the investment thesis is incorrect or changes to the company render the previous investment thesis obsolete

If there's no change to the initial thesis after re-evaluation, the value investor should remain steadfast and weather the volatility.

Of course, the above is very idealistic - it assumes that human emotions do not affect the value investor...

[fat al]

I may use stop loss for short term speculative trades entered without much conviction. Then again, there is a risk of ending up with long track record of consistent small losses.

I share the same views of some earlier postings:

If there's no change to the initial thesis after re-evaluation, the value investor should remain steadfast and weather the volatility.

Dont think a value investor should bother thinking about it.

IMO, no merits loh, to a value investor. Will have to put the stop loss at 100% anyway...

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

1) The opportunity to sell first and pick up at lower prices is not enough to compensate me for the risk of losing my initial position.

2) If I still need protection against poor initial evaluation or black swan events, I would prefer options if available. However, since I would have considered the margin of safety at entry, I would most likely not hedge any downside risks. Also, I am too cheapskate to spend money on options.

3) As to risk of significant loss arising from corporate fraud (Enron, CAO type that invalidates totally the initial evaluation), I mitigate by diversification.

4) Theoretically, for macro events (eg. sep-11) that has a longer term impact on the entire market, index futures can be used in place of individual stock stop loss (either short position or put options). Problem is that this may need some margin requirements, dragging your portfolio returns. For me, focusing on value and margin of safety, I tend to believe the stocks I hold are less sensitive to market volatility. So I accept this risk as it is.

Given the above, stop loss is not for me. It may suit others.

[chialc]

I read about stop-loss long time ago but had never use it before.

Most local brokerage does not offer this feature so automatic stop-loss is out of questions. (SCB has this feature thou).

Manual/mental stop-loss aka using email/sms/alerts is useful for me, primarily as a trigger point for market entry (rather than exit).
This applies to both shares that I own and also those that I don't aka in my watch-list.

After I read Clement post, I agrees that stop-loss could be a powerful risk management tools and I am considering using the automatic version selectively for blue chips counters (because of higher liquidity).

For the illiquid counters, I aim to buy more when the manual stop-loss is trigger.

天天快了

[Jared Seah]

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!)

[opmi]

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?