“Small Losses are part of the game. Big losses take you out of the Game.” Ed Seykota, Market Wizard and Trend Following Legend
Another up and down week in the Market. And every pundit seems to have a crystal ball trying to predict when ‘the big one’, the next major downtown, will occur.
If you have gained a great deal of upside growth in your portfolio during this longest of bull markets, do you really want to lose some or possibly most of it when the correction occurs?
No one likes to lose money. Everyone likes to make it. And everyone likes to keep what they have made!
So what to do?
It appears that many people are anxious and not sure how to answer that question. They don’t want to sell too early and perhaps miss out on more gains. But what if they wait too long and the market tanks?
But wait, many experts say you can buy on the dip! There will be lots of buying opportunities.
With what? When you look at your account balance statement, you realize you may not have much cash to grab those bargains. If you have ever ridden the market down, you feel pretty much like that bull rider laying on the ground in the TV commercial for pain relief.
And here is a News Flash, when the Market goes down, 25% for example, there are individual stocks that went down a lot further. And that portfolio full of ETFs that track the market? They are down 25%, too.
What is an investor to do?
There is an answer and it will help you to manage that risk so that when the Market does ‘correct’ (think about that word – does that mean the market is wrong now and has to correct itself? Could be.) you will be on the sidelines with most of your gains. And able to take advantage of “buying the dip.”
“We see the latest correction not as a disaster, but as an opportunity to acquire more shares at low prices. This is how great fortunes are made over time.“ Peter Lynch
Peter Lynch’s words are true. And getting out of losing stocks is one way to have the money to acquire those trending stocks at low prices and get on the path growing profit.
Let’s take a look at a few very recent scenarios:
PayPal (PYPL) stock went from $260/share on February 5, 2021 to $126/share on February 4,2022. A more than 50% loss! To recover from that loss will require a 100% increase in the value of the stock!
Maybe that kind of growth can happen but how long will it take….just to get back to EVEN?
Peloton’s (PTON) stock went from $148/share on February 5, 2021 to $24/share on February 4, 2022. You read that right. A staggering $124/share Loss!
If you didn’t sell at $91/share last October, or $55/ last November, or hopefully $35/share in January, 2022, and you are still holding that stock, the price has to increase 500% to get back to EVEN!!
Maybe, if you are incredibly lucky, another company will buy Peloton but at what price? In the inimitable words of Clint Eastwood, “Do you feel lucky??”
What can an investor do?
In order to avoid riding the market or a specific stock down, the investor needs a Risk Management Strategy and tools to help implement it.
Thoughtfully and unemotionally determine a reasonable stop loss amount (aka, “I am willing to risk losing this much money but not more, so I can sleep at night”) and place a trailing stop loss order with their broker.
To help the investor determine a reasonable stop loss amount Trending Stocks calculates a stop loss amount. It’s right here in Trending Stock’s “Today’s Report”.
For example: Marathon Oil Corp (MRO) current closing price is $21.50. The system calculated a stop loss at $4.01 or a percentage of 18.65%.
The system provides a reasonable stop loss order in dollars and by %. It’s a great starting point to help the investor determine what stop loss is best for them based on the stock’s volatility and their personal risk tolerance.
An investor might choose a higher or lower stop loss amount. Our Stock Trade Calculator© is another tool to aid the investor in managing risk.
How does this help?
None of us know for certain how much the market or an individual stock may decline and when it will do so. If the market/stock continues to rise in price, the trailing stop moves up with it and can lock in profit along the way. It ‘trails’ the stock.
But, you ask, “what if the stock drops in price before I have gained any profits and the stop takes me out? I might have a loss.”
Not only is that a distinct possibility, it will happen from time to time. The goal is a “small” loss vs. riding the stock down for a large loss.
You are working on “managing risk” not eliminating it. The only way to eliminate loss in the market is to not invest. That may not be a happy statement but it is true.
Here is an example. It is painful and it is real.
If you had bought 100 shares of the Peloton stock on 2/12/21 for $154/share for an investment of $15,400.00 and placed a trailing stop loss order at $30.80/share, because you didn’t want to stop out too soon, the stock would have sold on 2/24/21 for $123.20/share providing you with cash of $12,320.00.
The only thing that really makes you happy about that number is that if you held on until 2/4/2022, the value of your stock would be $2,460.00!
When the market is choppy or very volatile you can always place an even more “conservative” stop loss orders to prevent stopping out too soon.
According to J.P.Morgan’s Guide to Retirement, from January, 2001 to December, 2020, six of the seven best trading days came not long after the worst days.
The question is: if you are fully invested and ride the market or individual stocks down, do you have the money to take advantage of those good trading days? Even if you aren’t fully invested, you may not be inclined to invest the cash you have left.
We have several ‘mantras’ that we believe in. Ride Your Winners. Cut Your Losses. Always use trailing stops. Thoughtfully, unemotionally and constantly Manage Risk! And, whatever you do, do Not ride the market down!
Since we had been very traditional Buy and Hold investors, these were extremely painful lessons to learn. Hopefully, you won’t have to learn the hard way.
If you have not done so already, please, review your portfolio and set reasonable trailing stop loss orders now.
No one knows when the next Correction/Downturn will happen. It may have already started.
To learn more about the Trend Following strategy, please visit our FAQs, and follow us on LinkedIn, FaceBook and Instagram.
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Be sure to watch for our Trend Tidbits and next Month’s The Trend!
To learn more about the Trend Following strategy, please visit our FAQs, and follow us on LinkedIn, FaceBook and Instagram.
Not a subscriber to the Trending Stocks Dashboard and Platform? Don’t miss out. Sign up for the Free 4 Week Trial! START MY FREE TRIAL
Be sure to watch for our Trend Tidbits and next Month’s The Trend!
