I started serious Investing Journey in Jan 2000 to create wealth through long-term investing and short-term trading; but as from April 2013 my Journey in Investing has changed to create Retirement Income for Life till 85 years old in 2041 for two persons over market cycles of Bull and Bear.

Since 2017 after retiring from full-time job as employee; I am moving towards Investing Nirvana - Freehold Investment Income for Life investing strategy where 100% of investment income from portfolio investment is cashed out to support household expenses i.e. not a single cent of re-investing!

It is 57% (2017 to Aug 2022) to the Land of Investing Nirvana - Freehold Income for Life!

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Welcome to Ministry of Wealth!

This blog is authored by an old multi-bagger blue chips stock picker uncle from HDB heartland!

"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." - Dr. Alexander Elder

"For the things we have to learn before we can do them, we learn by doing them." - Aristotle

It is here where I share with you how I did it! FREE Education in stock market wisdom.

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Value Investing
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Saturday, 10 October 2009

Portfolio Management - Stop Losses?


What is Stop Loss?

Setting a stop-loss for x% below the price you paid for the stock will limit your loss to x%. This strategy allows investors to determine their loss limit in advance, preventing emotional decision-making.

What are the Guru's recommendation of Stop Loss?

Alexander Elder strongly believes in (the 2% and 6% rules).

William O'Neil: Whenever a stock is bought, a tight stop loss of 7-8% is set below the purchase price. No matter what the reason for the decline, each stock should be sold without hesitation if it drops down to or below this limit.

Many traders and active investors follow closely the classic text book and Guru's advice and follow strict stop loss strategy. But, unfortunately I am a DUMMY and I don't use STOP LOSS.

I do CUT LOSS. But, CUT LOSS is different from STOP LOSS. STOP LOSS means when price of your stock that you have purchased falls and hits your STOP Loss level, you sell it.

I do cut losses to recover capital and redeploy the recovered capital to other stocks, but it is not related to the falling stock price. I don't need to win back in the same manner that I have lost.

One day in 2008, a guy came to this cbox and said: "Bro, do you have stop loss and you are holding a losing position for too long!"

I replied: "Bro, I don't use stop loss"

I don't believe when the price of a stock falls after purchase means it is approaching towards STOP LOSS. Why must it be so? Because the text books say so or the Gurus say so.

A medical doctor who is very passionate in trading said:

I don't use stops. Here is why?

I agreed with this doctor and I am so happy that I am not the ONLY FOOL who don't follow Guru's advice on stop loss.

Why I don't use STOP LOSS too? My reasons.

Digest this and fully UNDERSTAND what the Doctor is prescribing:

"What I learned was that I needed to learn how to manage my own risk without using stops. Using stops is asking an external tool (the stop itself) to manage your risk. You always have to pay to have someone else or something else manage your risk, and the flip side of that is that you get paid for managing your own risk.

This is the concept behind mortgage pricing. Fixed 30 year mortgages cost more because the institution is managing the risks involved with interest rate fluctuations. In contrast, for a 1 year variable loan, you as the borrower carry that risk, and you pay less for your money over the long term for doing that.

Anyway, I am digressing. In terms of the market, you need to learn how to carry your own risk. I do this in my own account by making sure that my position sizing is relatively small amount based on the variability of the stock relative to my account size."

Like the Doctor, instead of using STOP LOSS to manage risks, I manage risks from different perspectives. I have trained myself very hard to look at Portfolio and not at stock. A few falling stocks may not impose a big risk to me. There are few important things to note:

1. I don't use any Leverages
2. I am using cash that are not needed for next 5-7 years.
3. I have enough emergency fund
4. I will only hold on to falling blue chips that Temasek or White Knights are likely to come to rescue

Many days later in 2008 after that guy who has asked: "Bro, do you have stop loss and you are holding a losing position for too long!"

Another woman (she is now known as SuperMum) came and asked at another cbox asked: "Do anyone use stop loss?"

Please help yourself to read the rest of the posts related to Portfolio Management.


So do you want to join the fellowship? Let me know. LOL.
I told her the reasons why I don't use. OMG, she became a disciple of NO STOP LOSS strategy. But, before you also get excited and want to join the FELLOWSHIP OF NO STOP LOSSES.

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