Re: Just bought my 1st 2 stocks
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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
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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.
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