Stop Loss Orders
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Stop Loss Orders Just wanted to know does your club use Stop Loss Orders. If so what percentage from current price do you have it set Our club does use such orders on all non-dividend paying stocks (largely growth companies). Initially, we set the price 10% below our purchase price. We think this gives the stock enough "wiggle room" to account for daily gyrations, yet also sufficiently limits our losses. Avoiding large losses is a primary goal of our club because the mathematics works against the portfolio so when large losses mount. For example, if an investment loses 50% (say a $100 dollar investment drops to $50), one now needs a 100% return to get back to even (doubling the $50 to $100). These types of losses can be debilitating. Once an investment becomes profitable for us, we
continue to raise the stop-loss order sell price, keeping it 10% below the current market price. Once set, this price is never lowered, but the stop-loss sell price can be raised as a stock continues to run. For example, we currently own Headwaters, Inc. (HW) purchased at just over $9/share. The closing price on Wednesday, May 28, 2014 was $13.19, so we set the stop-loss price at $11.87, hopefully ensuring a small profit in the process. If the sell order kicks in, we may re-examine investing again if the pull-back continues significantly after we perform our due diligence on why the company stock is losing ground. Hope this has helped. Rick On Sunday, June 1, 2014 1:17 PM, RUSSELL WARD <russdward@gmail.com> wrote: Just wanted to know does your club use Stop Loss Orders. If so what percentage from current price do you have it set My club did use trailing stop orders up to the end of last year. We decided to stop using them because we have had many stocks that that sold out from under us when we didn't want them. The majority of the stocks came back so we were disappointed that they were sold. John On Sunday, June 1, 2014 6:58 PM, "ignore-business-mogul-yahoo-com@bivio.com" <ignore-business-mogul-yahoo-com@bivio.com> wrote: Our club does use such orders on all non-dividend paying stocks (largely growth companies). Initially, we set the price 10% below our purchase price. We think this gives the stock enough "wiggle room" to account for daily gyrations, yet also sufficiently limits our losses. Avoiding large losses is a primary goal of our club because the
mathematics works against the portfolio so when large losses mount. For example, if an investment loses 50% (say a $100 dollar investment drops to $50), one now needs a 100% return to get back to even (doubling the $50 to $100). These types of losses can be debilitating. Once an investment becomes profitable for us, we
continue to raise the stop-loss order sell price, keeping it 10% below the current market price. Once set, this price is never lowered, but the stop-loss sell price can be raised as a stock continues to run. For example, we currently own Headwaters, Inc. (HW) purchased at just over $9/share. The closing price on Wednesday, May 28, 2014 was $13.19, so we set the stop-loss price at $11.87, hopefully ensuring a small profit in the process. If the sell order kicks in, we may re-examine investing again if the pull-back continues significantly after we perform our due diligence on why the company stock is losing ground. Hope this has helped. Rick On Sunday, June 1, 2014 1:17 PM, RUSSELL WARD <russdward@gmail.com> wrote: Just wanted to know does your club use Stop Loss Orders. If so what percentage from current price do you have it set I regard stop loss orders as guaranteed losses. I really was curious about a club that is worried about protecting against sudden, unexpected 50% drops in price. What kind of stocks is this club buying? The writer gives us an example: Headwaters. This company is the antitheses of a quality, growth company. So, yes perhaps they do need to worry about a 50% price drop. Personally, I'd rather look for long-term sales growth, reliable pre-tax profit margin, and consistent earnings per share. I also care about a reasonable debt ratio. Linda Glein Linda, Regarding the stop-loss order response, stocks that have had 50% losses are not uncommon. I will use "ball park numbers" simply to save time with the following examples. The Nasdaq, dropping from over 5,000 to under 1,500 involved many technology companies losing more than 50% of their value. General Electric has never reached it's peak of approximately $50 / share under Jack Welch. Approximately 13 years later, many investors who purchased at the peak, who did not cost average down and held the stock, may still have not recovered their losses. So much for long-term investing with this particular company. General Electric lost approximately 50% of it's value once again during the most recent financial crisis. GE is certainly not a small-time technology start up. So, these situations can cover a broad range of
investments. I stated we use stop-loss orders for non-dividend paying stocks only, largely growth companies. The key word being largely. These investments, at least for our partnership, may include growth, potential turn-around situations, etc. The point was, we do not use stop-loss orders for our core portfolio of large, dividend paying companies (usually slower growers). In the case of General Electric, if we owned the company (which we did not) we would have likely chosen to "cost average down" on that
particular position. You ask "what kind of stocks is this club buying?" and then take issue with Headwaters. However, considering we purchased HW at $9.07 / share on 10/01/2013, I think a 40%+ return on the investment in 8 months is impressive (something bivio will not likely do, but could certainly confirm). Our Quest for Positive Relative Returns is impressive relative to our peers who have signed up to be monitored. Results speak volumes, so we are comfortable with the criticism / curiosity. In an age of two major "black swan" events in less than 15 years, flash crashes and fraudulent accounting, I am
curious what type of club (and individuals) would not consider such scenarios prior to any investment decision. Does not intellectual thoroughness demand discussing as many scenarios as a group can come up with? We may spend more time focusing on the scenarios we believe to be most likely, but at times our forecast weightings for likely scenarios can be off. Lastly, for the individual who asked the question originally, we implemented this policy after our experience with the non-dividend paying company Bill
Barrett Corporation (BBG). We purchased at $21.89, watched the stock run to over $30 in a few short months, only to watch the gains disappear. A "moving stop-loss order" from the time of purchase would have likely resulted in our selling the company around $27 for a significant gain in a short time period. Instead, we took a small loss (less than $30, commission included) and implemented the policy of trailing stop-loss orders on these types of investments. It is not likely a good fit for all partnerships, but it
works for ours (Tactical Gains Investment Fund). Regards, Rick On Sunday, June 1, 2014 11:45 PM, Gary Glein <gaglein@comcast.net> wrote: I regard stop loss orders as guaranteed losses. I really was curious about a club that is worried about protecting against sudden, unexpected 50% drops in price. What kind of stocks is this club buying? The writer gives us an example: Headwaters. This company is the antitheses of a quality, growth company. So, yes perhaps they do need to worry about a 50% price drop. Personally, I'd rather look for long-term sales growth, reliable pre-tax profit margin, and consistent earnings per share. I also care about a reasonable debt ratio. Linda Glein Hi, I would caution clubs, however against just setting blanket stop loss orders on everything without using a thought process like Rick is using.It sounds like Rick's reasoning has a thought process behind it. It would appear that stop loss orders can certainly be an appropriate tool for an investor to use under certain circumstances. Laurie Frederiksen
Invest with your friends! www.bivio.com Become our Facebook friend! www.facebook.com/bivio Follow us on twitter! www.twitter.com/bivio Follow Us on Google+ Click here to Subscribe to the Club Cafe email list. Click here to Unsubscribe Laurie, Is the Sunday session posted where I can print am copy of the session. Thanks.
Judy
"Go forth in the busy world and enjoy it. Interest yourself in its life, mingle kindly with its joys and sorrows"
From: [mailto:]
On Behalf Of Laurie Frederiksen
Hi, I would caution clubs, however against just setting blanket stop loss orders on everything without using a thought process like Rick is using. We often see clubs with such automatic stops selling below what they purchased a stock for so their stop loss results in a capital loss. If they were doing dividend reinvesting, they might have also automatically purchased shares within 30 days prior to the sale. This creates a wash sale they then have to account for. Not a problem, since bivio can handle wash sales. Just extra work for their treasurer and potentially very complicated accounting issues if it is a DRIP situation. We also see clubs that have their stops triggered for a loss and then seem to immediately decide that they didn't want to sell the stock after all. If they repurchase within 30 days, this also creates a wash sale and potentially complicated accounting issues to handle for no apparent reason. Make sure if you set a stop for a certain price that you know you are ready to let go of the stock at that price. Don't set it and forget it. So it's fine to use them, I'd just recommend you use them wisely and with conscious decisions and that you revisit those decisions regularly. I wouldn't recommend you just blindly apply them to all the stocks in your portfolio and then forget about them.
Laurie Frederiksen
If our monthly portfolio review shows that a stock has had declining earnings for three quarters, a possible sell trigger, but displays no other specific reason to sell, we place a trailing stop order on it at 90% of the current price. If earnings continue to fall we may order a sale. If the price falls, the TSO will trigger a sell. We never place a trailing stop order for no particular reason, such as to limit our losses 'just in case'. Mike Jones Wall$treet Wannabees Bloomington, MN From: "ignore-business-mogul-yahoo-com@bivio.com" <ignore-business-mogul-yahoo-com@bivio.com> To: "club_cafe@bivio.com" <club_cafe@bivio.com> Sent: Monday, June 2, 2014 6:58 AM Subject: Re: [club_cafe] Re: Stop Loss Orders Linda, Regarding the stop-loss order response, stocks that have had 50% losses
are not uncommon. I will use "ball park numbers" simply to save time with the following examples. The Nasdaq, dropping from over 5,000 to under 1,500 involved many technology companies losing more than 50% of their value. General Electric has never reached it's peak of approximately $50 / share under Jack Welch. Approximately 13 years later, many investors who purchased at the peak, who did not cost average down and held the stock, may still have not recovered their losses. So
much for long-term investing with this particular company. General Electric lost approximately 50% of it's value once again during the most recent financial crisis. GE is certainly not a small-time technology start up. So, these situations can cover a broad range of
investments. I stated we use stop-loss orders for non-dividend paying stocks only, largely growth companies. The key word being largely. These investments, at least for our partnership, may include growth, potential turn-around situations, etc. The point was, we do not use stop-loss orders for our core portfolio of large, dividend paying companies (usually slower growers). In the case of General Electric, if we owned the company (which we did not) we would have likely chosen to "cost average
down" on that
particular position. You ask "what kind of stocks is this club buying?" and then take issue with Headwaters. However, considering we purchased HW at $9.07 / share on 10/01/2013, I think a 40%+ return on the investment in 8 months is impressive (something bivio will not likely do, but could certainly confirm). Our Quest for Positive Relative Returns is impressive relative to our peers who have signed up to be monitored. Results speak volumes, so we are comfortable with the criticism / curiosity. In an age of two major "black swan" events in less than 15 years, flash
crashes and fraudulent accounting, I am
curious what type of club (and individuals) would not consider such scenarios prior to any investment decision. Does not intellectual thoroughness demand discussing as many scenarios as a group can come up with? We may spend more time focusing on the scenarios we believe to be most likely, but at times our forecast weightings for likely scenarios can be off. Lastly, for the individual who asked the question originally, we implemented this policy after our experience with the non-dividend
paying company Bill
Barrett Corporation (BBG). We purchased at $21.89, watched the stock run to over $30 in a few short months, only to watch the gains disappear. A "moving stop-loss order" from the time of purchase would have likely resulted in our selling the company around $27 for a significant gain in a short time period. Instead, we took a small loss (less than $30, commission included) and implemented the policy of trailing stop-loss orders on these types of investments. It is not likely a good fit for all
partnerships, but it
works for ours (Tactical Gains Investment Fund). Regards, Rick On Sunday, June 1, 2014 11:45 PM, Gary Glein <gaglein@comcast.net> wrote: I regard stop loss orders as guaranteed losses. I really was curious about a club that is worried about protecting against sudden, unexpected 50% drops in price. What kind of stocks is this club buying? The writer gives us an example: Headwaters. This company is the antitheses of a quality, growth company. So, yes perhaps they do need to worry about a 50% price drop. Personally, I'd rather look for long-term sales growth, reliable pre-tax profit margin, and consistent earnings per share. I also care about a reasonable debt ratio. Linda Glein |
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