November 22, 2012 Comments

Today’s star performer was, once again, Research in Motion. Up 17% to an even $12.00. It started this year at $14.50, so it is still down 17% on the year. But it is up 97% from its low of $6.10. Clearly there was money to made and money to be lost by buying and selling at the right time. I don’t advocate a trying to trade rapidly in and out of stocks. But even a strategy of having bought at the start of the year or at any price over the past 18 months or so and then adding on the major dips and perhaps trimming on major rallies would have worked out reasonably okay. The thing is the stock was less risky at $7 than it was at $14. As I have explained previously, this company had no debt and has a huge installed base of subscribers. It is not was not and will not “go to zero” in the foreseeable future because there is too much real value there.

I’ll mention a word on Stop Losses, which I don’t use and have only ever used on extremely rare occasion in my 24 years of investing. Last week a company called Poseidon Concepts Corp. (which I knew nothing about) was in the news because it opened on Thursday morning at $5.79 after closing on Wednesday at $13.22. Anyone with a stop loss below $13.22 and above $5.79 was automatically sold at the open at $5.79. So, if an investor had a stop loess at $13 they got sold at $5.79, which did not stop much of the loss. (it did stop some since the stock is now at $5.26 and had a low of $4.76).

And the way the Stop Loss worked was perfectly as designed and was perfectly fair. The bad news came after the markets closed on the Wednesday. No one got to trade at a high price before the stock plunged. The bad news was “priced into” the stock right at the open.

Now admittedly the stock had come down in the previous weeks from highs of near $17. So some people may have been nicely protected by stop losses that had triggered on the Wednesday or earlier. But that is tough to do. A tight stop loss can be executed just due to sort of normal volatility and sell you out needlessly. A wider stop loss may turn out not to work if there is major bad news and the stock “blows through” the stop loss price and well below before it can be sold.

The bottom line for me is I don’t use stop losses. That’s because I don’t buy or sell based on what the market thinks a stock is worth. Using Stop Losses smacks of “Sell Low”, which is the opposite of what I am trying to do.

Stop losses are for traders who trade stocks. I analyze companies not squiggles on the screen. Some people may be very successful simply looking at price charts (squiggles). That simply is not my approach. I talk about earnings, traders talk about momentum and support levels and 52 week moving averages. I basically don’t even speak that language and have no interest in learning it.

Stop Losses are also more appropriate for more risky stocks where it seems conceivable that a loss of 50% or whatever could happen at any time. For many larger and more stable companies it may simply be very unlikely that the stock would plunge by a huge amount. Therefore there is less need to protect against the risk.

For those who use and swear by Stop Losses, that is great, to each his own. I simply point out that I have little or no use for them. I am more likely to be buying on dips than selling.