To stop stock loss, neither a gambler nor a holder-on be

To stop stock loss, neither a gambler nor a holder-on be

MARCUS PADLEY
July 3, 2010

I RECENTLY wrote an article declaring that the biggest mistake a private investor can make is not selling. Since then I have been bombarded with questions about my own stop-loss selling strategy. So I'll tell you.

But before I do, you should know that I am possibly a little different to most of you. I have learnt to sell as easily as I buy. I am regularly in 100 per cent cash. I don't need to be in the sharemarket.

I don't need the sharemarket for a dividend income and I long ago got over the philosophy that you hold stocks forever - utopian crap - and that you can't time the market - a lazy professional's excuse for doing nick all for his money.

So, with that disclaimer, here are a few of my stop-loss strategies that you might consider for yourself.

THE HOLIDAY STOP-LOSS

I sell everything before I go on holiday. I once ruined a holiday by fretting about some dumb stock position when I should have been chasing my wife and kids around. Never again. Of course, I'm not suggesting you do that. It's just that when you have your head in the sharemarket all day every day, a holiday isn't a holiday unless you get it out.

THE INSOMNIA STOP-LOSS

I sell anything that could possibly keep me awake tonight. Sorry, but I reckon it's really dumb to be worrying about what Wall Street's going to do overnight. Let's face it. If that's your concern, then you are gambling, not investing. Utter luck is a cruel mistress and if that's what you are relying on, you have gone astray. Unless, of course, you use the sharemarket to gamble, for creating a rush. That's fine. But don't dress it up as anything clever. There's nothing clever about going to bed with your fingers crossed.

THE ANXIOUS STOP-LOSS

I sell anything that is disturbing me. I put a high value on my frame of mind. With only 252,522 days left to live, of course you can't really afford to waste any time being miserable, especially not about money, which ultimately, is all that stocks represent. Biting the heads off the kids or blowing your window of opportunity with the missus because of some dodgy stock is about as stupid as it gets. Those windows are pretty small. So if in doubt, get out.

THE OBJECTIVITY STOP-LOSS

I used to operate a stop-loss that triggered when a loss was so big I felt I wouldn't be able to tell Emma. But when I confronted her with one once it turned out she had a bigger risk appetite than I did. Embarrassing as it is, my wife has the bigger kahunas. I bottle it before she does. So that little system has become redundant. But for you, it may not be. If in doubt, discuss it with someone. When things are about as bad as they can get, you need objectivity, which means you need to talk to someone. Use someone else as your stop-loss.

THE PUNCHING THE AIR STOP-LOSS

I sell anything that provokes me to stand up at my desk and punch the air in delight. As any stockbroker will tell you, euphoria means ''Sell''. It has exceeded your expectations and asking for more is simply greed. You have to book the wins some time. This is as good a moment as any.

THE DENIAL STOP-LOSS

I sell anything I get wrong. Stocks analysis is not a science. You cannot pin down certainty. And there are so many variables and so much sentiment that getting it wrong is to be expected, is inevitable, and when you do get it wrong you have to act, not deny. There is no room for pride in stock decisions. Advisers telling clients not to sell because they couldn't admit they got things wrong in the financial crisis (pride and denial) cost billions of dollars and thousands of client relationships. We all get things wrong. Accept that and half the game - not losing money - is won.

THE SCHOOL FEES STOP-LOSS

Paying essential bills takes priority over trading, I'm afraid.

THE DIVORCE STOP-LOSS

Only triggered it once and if you can exercise the ''engagement ring thrown at you'' stop-loss effectively you'll never actually need it.

I could go on.

Marcus Padley is a stockbroker with Patersons Securities and author of the daily sharemarket newsletter Marcus Today. For a free trial, go to marcustoday.com.au

Source: The Age


Comment:  
On the other hand, there is a person I know who "lost" money each time he sold, as his sold stocks continue to go higher subsequently.