Just bought my 1st 2 stocks

[1C5]

Got 100 shares of Cheesecake Factory (CAKE) and 200 shares of Yankee Candle Company (YCC)>

Not 100% sure of each purchase but I wanted to make sure IB worked. /images/graemlins/shocked.gif

Put pretty tight stop loss on each of them so will only be town $200 each if they really tank.

I like YCC as they just took a hit with bad earnings yesterday and are not cutting staff and underperforming stores, I think they can make a comeback...we will see though.

And CAKE, if I don't get stopped out, I think they will have a good holiday season when the hurricane stuff is cleaned up in FL and the East coast.

[r3vbr]

The concept of "stop-loss" is irrational.

As someone smart once said..
If you value something at 10, you're a buyer at 8 and a seller at 12.

So if you buy a stock at 10 and put a stoploss at 8 means you're a seller at 8? that doesnt make sense. People who do this are buying something they have no idea what it's worth

[1C5]

So if I do my research and am wrong on a stock, (Are you 100% right in picking stocks?) it would be better to have no stop loss and just "hold on for the ride" even if the stock drops 50%?

Your reasoning makes no sense either.

PS, I just got stopped out of my CAKE stock, -$170 .

Well, if it drops big without a corresponding news item, you should carefully redo your research and analysis. If you still think the stock was undervalued when you first bought it, you should probably buy more rather than sell.

These drops can be great buying opportunities. MIK, for example, has a tendency to overreact and drop 20% when they miss earnings projections by a couple pennies. Then it overreacts the other way when the next quarter beats projections.

[r3vbr]

So you're content in buying a stock for 10$, and them if it falls to 5$ for no reason, you sell?

Do you do this with everything in your life (i.e. house/car/etc)

Let's say you are a businessman who travels a lot so you buy a New York appartment valued at 1 million USD to sleep there when you're in town, and also because you think prices are going up and feel like speculating on real estate. Now let's say the market crashes the very next day, and now the market only pays 500k for the brand new appartment wich you didnt even use..

Would you even consider selling it at this new price?

Why would it be any different with stocks? Please explain.

[buffett]

[ QUOTE ]
The concept of "stop-loss" is irrational.


[/ QUOTE ]

He's right. Here's a quote from Ben Graham:

"In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, 'This too shall pass.' Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY."

So if you think CAKE is worth $35, don't pay $35 for it. Don't even pay $30 for it. Wait until it gets to such a low price ($25 for some, $20 for others, depends on taste) that the probable downside from there won't hurt as much. Sure, as 1C5 said, you may be wrong and the stock may drop to 50% of its value. But the fall from 25 to 17.50 is much smaller than from 35.

One of the greatest investors of today is Mohnish Pabrai. When he bought Tesoro, he first paid $7.50 (because he thought it was worth, conservatively, $15). He bought it all the way down to about $2, and he sold it at $15. It's now at $57.

You're never going to get the absolute bottom, and you're never going to get the absolute top. But if you invest with a margin of safety, you can strive to be as good as Mr. Pabrai (whose annualized after-fee returns are in the neighborhood of 32% for the past 6 years or so).
-web

[Sniper]

If you are playing the fundamental game, and you are truly doing your homework, then buying as a stock goes down and continues to go down may make sense.

But most people, do not evaluate their stock purchases enough to know when a stock going down is still a value as opposed to a negative change!

New players to the stock market that don't do their homework, as well as short term traders... MUST use stop losses!... to control their risk!

[kagame]

worst advice ive ever read on here

a stop loss keeps positions from going against you so horrifically that you CANT stand any more pain and sell much too low

also, the market is not a perfectly efficient machine, a stop loss can save you money even if the stock does indeed go back up to its "proper" value later

almost every efficient system for trading the markets involves some sort of loss limiting procedure

[r3vbr]

[ QUOTE ]
worst advice ive ever read on here

a stop loss keeps positions from going against you so horrifically that you CANT stand any more pain and sell much too low

also, the market is not a perfectly efficient machine, a stop loss can save you money even if the stock does indeed go back up to its "proper" value later

almost every efficient system for trading the markets involves some sort of loss limiting procedure

[/ QUOTE ]

Read my earlier post about the example with a piece of real estate, would you do the same stop-loss procedure if that were the case? if not, please identify the diferences.

[vindikation]

Unlike a mutual fund, an individual stock can continue to decline and go to zero, when should you sell the declining stock, never?

It also keeps your money tied up while your waiting for the stock to increase (if it does). If it's falling way beyond your initial expectations, doesn't it make more sense to cut your losses and move the money into another potentially profitable stock or some other form of investment?

[kagame]

you can use real estate, it has intrinsic value

stock is just a piece of paper

[Paluka]

Stop losses dont' make a lot of sense. If the stock falls, you should obviously re-evaluate the situation and then make a decision. You might decide you'd like to buy more of a stock at the lower price.

[DesertCat]

[ QUOTE ]
If you are playing the fundamental game, and you are truly doing your homework, then buying as a stock goes down and continues to go down may make sense.

But most people, do not evaluate their stock purchases enough to know when a stock going down is still a value as opposed to a negative change!

New players to the stock market that don't do their homework, as well as short term traders... MUST use stop losses!... to control their risk!

[/ QUOTE ]

Even though I think stop losses are silly, this advice is actually pretty good.

If you can read and understand a quarterly report, understand the balance sheet, income and cash flow statements, you can estimate intrinsic value. Even if you have uncertainties, you can give yourself a large margin of safety. In that case if you buy below your margin of safety, it's foolish and counter productive to have a stop loss.

But if you don't understand IV, or can't read financial statements well enough to estimate one, a stop loss is a lessor of evils. You shouldn't be investing in individual stocks, but a stop loss helps protect you from yourself.

If you are a losing poker player, playing small in relation to your bankroll won't necessarily help you win, but it sure will help you play longer.

if you don't set stops you shouldn't be in the mkt....PERIOD!

[J_V]

You shouldn't be trading on your own. Trading with almost no idea what you are doing is a very bad idea.

http://www.warphead.com/modules/xoopsgallery/cache/albums/album02/captain_obvious.gif

[DesertCat]

[ QUOTE ]
if you don't set stops you shouldn't be in the mkt....PERIOD!

[/ QUOTE ]

Hmm, I've never set a stop, and never had a losing year. So I guess absolutes don't always apply, do they.

[DesertCat]

[ QUOTE ]
[ QUOTE ]
if you don't set stops you shouldn't be in the mkt....PERIOD!

[/ QUOTE ]

Hmm, I've never set a stop, and never had a losing year. So I guess absolutes don't always apply, do they.

[/ QUOTE ]

Actually I'm not the best example, Warren Buffett is. He never uses stops. I guess you are saying he shouldn't be in the market?

[Ed Miller]

[ QUOTE ]
stock is just a piece of paper

[/ QUOTE ]

I can buy paper for $3 a ream at Office Depot. Why would I pay $50 for one sheet that already has writing on it?

[r3vbr]

[ QUOTE ]
[ QUOTE ]
stock is just a piece of paper

[/ QUOTE ]

I can buy paper for $3 a ream at Office Depot. Why would I pay $50 for one sheet that already has writing on it?

[/ QUOTE ]

Real estate, you own a piece of paper that says you're the owner if a brick an mortar house.

Stocks, you own a piece of paper that says you're the owner of a brick and mortar house with machinery inside wich produces goods/value.

I prefer the 2nd piece of paper.

Also, I bet a blue chip stock like procter and gamble or GE has more intrisic value than almost any piece of real estate, and also less risk.

What I'm saying is, you can use stop losses in anything in life, if you realy believe in it.. so why just stocks?

[Kirkrrr]

Tired and not having slept in a ridiculously long time, shouldn't be posting, but here goes...

Stocks are subject to sometimes very wide, and for the most part whimsical, short-term fluctuations. At times your stock going down is the result of negative news only somewhat related to the actual business. If you know what you're doing and did your homework i.e. you know the "real" value of the stock, a downswing is a great opportunity to be taken advantage of. Stop-loss is akin to telling your bank teller "YOU DID WHAT?!?!" when they say "we overfunded your account, but the money might as well remain yours."

Kirk

[cwsiggy]

[ QUOTE ]
Real estate, you own a piece of paper that says you're the owner if a brick an mortar house.

Stocks, you own a piece of paper that says you're the owner of a brick and mortar house with machinery inside wich produces goods/value.

I prefer the 2nd piece of paper.

[/ QUOTE ]

Owning a house is way better than owning a stock and it's not even close! I'll let others elaborate. /images/graemlins/smile.gif

[kagame]

stated as a reason for stop loses

stocks can go down for no reason and stay down

the fundamentals VARY across time and place, its not a sure thing, and even if it was timeframe is still uncertain

this is obviously why you switch into blue chips with huge dividends when you grow older and want less risk

[kyleb]

[ QUOTE ]
But if you don't understand IV, or can't read financial statements well enough to estimate one, a stop loss is a lessor of evils.

[/ QUOTE ]

The lessor of two evils is still evil. If you can't do the things you listed, then you simply SHOULD NOT INVEST.

[Sniper]

[ QUOTE ]
The lessor of two evils is still evil. If you can't do the things you listed, then you simply SHOULD NOT INVEST.

[/ QUOTE ]

This is absolutely BAD advice!

There are many ways to make money from the stock market that don't require understanding or even caring about financial statements... just because they aren't YOUR way, doesn't make them wrong!

[1C5]

I should have made myself clear at the start.

This is a TRADING account and not an investing account.

Stop loss= Essential in a trading account IMO.

[DesertCat]

[ QUOTE ]
stated as a reason for stop loses

stocks can go down for no reason and stay down

the fundamentals VARY across time and place, its not a sure thing, and even if it was timeframe is still uncertain


[/ QUOTE ]

None of these reasons make a stop loss useful for a fundamental investor. Stocks can also drop 10% before they double, so you get stopped out of a huge gain.

And fundamentals don't "vary" at random or on a daily basis. If you believe a stock is worth $15, and you are willing to buy it at $10 (your "margin of safety"), why would you then sell it at $9? You should be buying more.

If new information leads you you re-estimate the stock's value at what it's trading at or less, then you sell it immediately, no matter what you paid for it. Waiting for your stop loss won't help there.

If you believe in fundamental analysis, your fundamental evaluation of the stock's true value should guide all of your buy sell decisions, not some mechanical sales rule. In that case, using stop losses will usually hurt your results, forcing you to sell positions when they are at even bigger discounts to true value.

These are all reasons why Buffett never uses stop losses.

One real life example. I once found a stock (MDF) that I was sure was worth close to $1.50, trading for 74 cents. It's real earning power was obscured by some money losing subsidaries, and a sharp new CEO had put together a plan to fix the company, jettison the losers, and focus on their core profitable business.

I bought my max at 74-75 cents. It immediately went down to 65 cents and I was sitting on over a 10% loss. I couldn't buy much more, so I just waited patiently. Every quarter the story unfolded, earnings increased, the balance sheet improved. I kept upping my valuation estimates as good news came through. Within a year I was finally able to exit at $3.

A stop loss would have cost me a 4x gain in one year. That's a pretty big price to pay for some false security.

[Sniper]

[ QUOTE ]
If new information leads you you re-estimate the stock's value at what it's trading at or less, then you sell it immediately, no matter what you paid for it. Waiting for your stop loss won't help there.

If you believe in fundamental analysis, your fundamental evaluation of the stock's true value should guide all of your buy sell decisions, not some mechanical sales rule. In that case, using stop losses will usually hurt your results, forcing you to sell positions when they are at even bigger discounts to true value.

[/ QUOTE ]

Cat,

This was exactly my point in the other thread... for fundamentalists, stops (exits) are based on value (a change in your you value calculation, that no longer makes the investment worthwhile) , rather than on technical criteria.

[Peter666]

I'd live in a tent for a year rather than a crappy house for the rest of my life if I knew my stock would make me rich. /images/graemlins/smirk.gif

[Peter666]

There are stocks that go down when their earning projections go up. Mr. Market is a retard.