Having a stop-loss is the greatest tool in equity investments if you want to make money long term

[believer4892]

I've seen a lot of people bagging equities and share investments in 2022 because of the poor performance of assets in 2022.

The most important thing in share investments is not being right 100% of the time. You can be right 50% of the time and still make a lot of money. The most important tool is to cap your losses and let the 'winners run'.

For example lets say you bought 5 stocks at 20k per stock:

Day zero

Stock A = 20k

Stock B = 20k

Stock C = 20 k

Stock D = 20k

Stock E =20k

Total portfolio value on day zero = 100k

Now lets say you were wrong on three of them and right on two of them. Lets say in 6 months the loosers are down 50% and the winners are up 50%.

Lets see what your portfolio is now worth after 6 months without a stop-loss

Stock A = 10k

Stock B = 10k

Stock C = 10 k

Stock D = 30k

Stock E =30k

Total portfolio value after 6 months = 90k (-10k down)

If you don't have a stop-loss then you will have a negative gain.

Now lets say you decide to cap your losses and a put a stop loss at 15% below initial purchase

Stock A = 17k

Stock B = 17k

Stock C = 17 k

Stock D = 30k

Stock E =30k

Total portfolio value after 6 months = 111k (11k gain)

You would be 21k better off by having that stop loss and you only had a success rate of 40%

 

[truthsearcher101]

@believer4892 To prove stop losses are good, you made up an example where they're good.

Here's better advice: don't put all your investments into 5 stocks.

 

[resjudicata]

@believer4892 This nonsense

 

[4defaith2017]

@believer4892 I used to manage a multi-billion dollar hedge fund and I can tell you, I don't see stop losses as a useful risk management tool.

 

[digitalwilderness]

@4defaith2017 That you Caroline FTX?

 

[4defaith2017]

@digitalwilderness Please don't use my name, I'm working with the Feds now.

 

[believer4892]

@4defaith2017 Yeah possibly. But for retail investors with a portfolio between 50k-1m it's a good tool. Hedge funds make money through volatility and speculation.

 

[theologyofone]

@believer4892 And if something dips to -15.1% before rising back up to +50%/100%, you've been booted off the gain train.

Buy an index, or buy on fundamentals and analysis until the analysis and basis of the investment (not the current price) changes or you reach your exit point

 

[believer4892]

@theologyofone You set the stop loss based on the volatility of the stock.

 

[bartman]

@4defaith2017 “Used to”

 

[goodbyeharry]

@believer4892 If a stock is down 50%, chances are that the other four are down too, just like the whole market

 

[fola]

@believer4892 I know very little about the mechanics of equities but I have always wondered whether the bigger retail brokerages use their knowledge of their customers’s stop loss positions to trade against them e.g. by trading down the market price, triggering the stop loss, and liquidating their customers by executing a trade that never reaches the bourse … the shares then bounce back to their equilibrium and the shares have effectively been purchased at a discount.

I expect there is regulation and information firewalls between brokers and traders, but when they’re both within the same organisation it seems like an obvious temptation.

I’d really appreciate anyone with more knowledge about the industry explaining if this actually happens or how it is prevented.

 

[onthepathtogod]

@fola Yeah, it’s called ‘stop hunting’ I don’t think anyone other than industry insiders/providers can categorically prove that it happens but maybe, like you, I have my suspicions.

 

[cah5896]

@believer4892 You just made up one example where they're good. What about the many other options

 

[beyondthebirch]

@believer4892 They work alright with NZ stocks that move very slowly but you can easily get caught out on an expected dip (earnings, split, dividend) and miss the run up, I think its safer watching the charts yourself and having. I know a lot of people who lost thousands from stop losses so made sure not to use them again.

In international stocks you would miss out on so many gains with their frequent fluctuations, Personally I'd find it safer buying covered calls than touching any stop loss

It also hugely depends if youre doing a time stop or volatility stop, New Zealand market is so slow moving I wouldn't even trust the volatility stop because out market is moved by extreme company actions/results or a few major players compared to retail driving the market, we don't have enough active traders for that data to be relevant

 

[truongcaaudio]

@believer4892 But if you keep buying and never sell you will never lose

 

[believer4892]

@truongcaaudio If you were holding Yahoo or Blockbuster you would be in the shits now. As Kenny Rogers would say:

You got to know when to hold 'em, know when to fold 'em

Know when to walk away and know when to run

 

[gamebai886]

@believer4892 "These brokers hate this one trick" lol

 

[rprimus]

@believer4892 Stops are good when you're a trader and need to pull out when you know you're wrong on your trade thesis but for a long term investor with a diversified portfolio it just soumds like a way to systematise buy-high-sell-low.

There's a reason this isn't standard practise and it's not that pros haven't been spart enough to figure it out.

 

[comiccarol]

@believer4892 Mohnish Pabrai has entered the chat