What about selling your losers and letting your winners run? Did William O'Neill come up with the 8% stop order? I'm thinking he had something sound in mind. Isn't every stop that has ever been executed been a sale on weakness?
On the other hand "no one ever went broke taking profits." We should buy when there is blood in the streets, we should buy when stocks are on sale.
Either camp (sell strength or sell weakness) can cherry pick thousands of examples to make their case but there is no way to know which is right except in hindsight. If a stock goes from $30 to $20 in a panic what it does next would just be a guess. If it goes to $10 then selling at $20 was the correct trade and if it goes right back to $30 a $20 sale was the wrong trade. Both examples exist.
Some people seem to be militantly devoted to one or the other and I have never understood this. The people who use 8% stops on everything got whipsawed hard this summer.
Can anyone say that the person who "panicked" out of the market during the first week of 2001 at the low of 1274 (this can been seen better by clicking on the chart) made a bad decision? Sure they would have done better to sell a week later but that misses the forest for the trees.Either method can be articulately defended and either one can be easily refuted with plenty of examples.
I have sold into both weakness and strength and have been right with both methods and wrong with both. Going forward I will sell with both methods and again will be both right and wrong with each one. If you choose just one method you will get some right and some wrong, ditto if you go with both.
So is there a right answer? I don't think so. I have written many times about not being married to either side and that works for me. You obviously have to do what works for you, more specifically what lets you sleep at night.
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Exactly! This should always be a matter of personal style and preference. Maybe you like to have a stop in place to make you sleep well. Maybe you always get stopped out only to watch the thing reverse and rocket in to the right direction (so you don't like stops anymore). I personally like to buy on sharp down days (Aug 16th, for example) and sell on sharp up days (Fed day). As you've mentioned before, hard sell offs are usually met with hard snap backs. I like a 3 strike and you're out approach for shorter term holds. I'll buy on a sharply down day, if it continues sharply down, I'll buy some more. Then finally one last time and if continues sharply down, I'm out. It's pseudo averaging down (because I think true averaging down means you keep going as the thing keeps dropping). Also, I should mention that I do this with ETFs mainly, rarely individual stocks.
This is a great opportunity to capitalize on the potential snap back, but it definitely hurts while I'm doing it.
I also agree that there's an adage for everything in the markets. Just like every move of the market can be explained away day in and day out (yet no one could tell you why it happened the minute before it did happen).
I run 5% stops. Obviously, you want to try to pick entry points carefully such that a 5% stop should not be needed. Of course, sometimes it is.
The rationale is, my alternative to trading is passive indexing. I do not treat my portfolio as a means of entertainent. The only rational reason I can see for trading is if you believe you can outperform a passive index.
If I am fully invested, get 60% of my picks right (which I've found to be very, very difficult) and make 25% on average in each of my winners, while accepting an average loss of 5% on my losers, and can maintain this performance over the long-term, I should significantly outperform the S&P index.
I think believing that one is capable of achieving this extraordinary confluence of events over a very long period of time is the height of arrogance.
Even this wouldn't have outperformed the Dow over the last year or two, however.
Darnnn. I check in here daily and I thought that I was part of an ideological cult. The emperor-wears-no-clothes post the last two days. I love it. As they say, "keeping us honest." Personally, trying to develop both styles. In one basket are rel mo etfs with stops; and in the other are mining stocks that I think lend themselves better to buy low-sell into strength. The higher the volatility and risk the more I want to lean this way. Microcap stocks would fit in here too.
I found this to an excellent post and something that I have been thinking a lot about lately.
I love these markets over the past few months have made me so much money. Great blog Roger and good luck guyss.
Good food for thought, Roger. I recently read that
fewer than 20% of market pros regularly beat the
market indexes. The same article said that amateur investors had returns pretty similar to the other 80% who underperform the market regularly.
So the pro gets his/her 2-3% commission rain or shine. It makes the lazy index portfolios look more and more attractive to me.
Example: my goal was to beat Brinker's index portfolio this year (50% broad market ,15% small cap,10% QQQQ, 15% foreign, 10% mid-cap), and have not succeeded. He is up (yesterday) 12%+ ytd. This is with fund fees of less than .5%.
Maybe it is time to throw in the towel and go
the cheap index lazy portfolio route, and pay someone like him a small amount to tell me when to be in and out of the market. This is one reason I appreciate your "cojones", Roger in publishing your return rates. Most money managers aren't that transparent, in my opinion. Thanks.
John Tudor Jones has a handwritten sign on his wall that says "losers average losers" > http://tinyurl.com/yprusz
I've read a lot about trading systems and "when to sell methods" and and there seems to be a good deal of support for the "let your profits run" school: i.e. sell only when there is evidence of a possible trend change, whether you use stops, moving averages, or other methods.
Although the best trend following systems only have hit rates between 50%-60%, the risk/reward metrics such as expectency makes these systems profitable.
http://www.iitm.com/sm-Expectancy.htm
Most investors can't stick with a system where they continuously give up sizable profits and sell only to see a security reverse.
So Rog,
If you made the mistake of selling into weakness by getting into the double short fund at just the wrong time, did you fix it by bailing out after an 8% drop???
Was that your little "plan".....?
Seems you didn't have a plan, and now are looking at at 20% loss in about a month......and you are still holding the bag.
At the end of the day, you panicked, and made a horrible decision, and you are still living with the bad decision...
My favorites, sell when the pain is too much to bear, or if it wasn't too much to bear, then sell when it gets back to break even, swearing never to put myself through that again.
charlie
The hardest thing I learned in the bond business was learning to sell down, if I felt the position was deteriorating; this was particularly difficult if the bond was illiquid... unlike stocks, bonds have no single central market, and finding the other side of the trade can be challenging.
The second hardest lesson was learning to buy up, if I thought the bond had not finished its run.
Today I do the opposite as a value investor in stocks. Resisting price trends is in general a good strategy, but one that requires high quality stocks that won't fall too far before fundamental buying interest emerges.
One more thing, Rog baby......
Before you dump on endowment investing principles, I suggest that you read Swenson. My suspicion is that your clients would be far better off following Swenson's advice, than with your picks.
Scoot, lazy is absolutely valid but yesterday you mentioned what sounded like a trade you made in emrging markets. i think i read a little emotion in your comments, positive emotion yesterday and frustration today. I would tell you to sort that out before making a big change.
David, I think you make the case for flexibility/adaptability. This is unquestionably important to long term success. Markets don;t reinvent the wheel but I do think they evolve. Useful comment.
Geepers. This is a topic well worth it, and you're right. Gotta just get into it the way YOU see fit. I've done silly things, like not put a stop under a rising stock, then watch it fall past my original purchase price for a good chunky loss. THAT's a hairpuller. I'm only a long-term investor, so I don't feel this daily.
The best things is to just have an initial plan; and even if that initial plan lost you some. Your idea was solid at the start, and you may learn. Waiting for a stock to 'return' to original price to break even, yes, often a bad mistake.
you make a huge point. waiting until breakeven so you can just get out is to care more about where a stock has been than where it is going.
losing faith in a stock is good reason to sell regardless of what you paid for it.
Rog, one of the reasons given (different venue than what you listed) for gold's climbing higher had to do with the gold carry trade. A week or three ago it was on FSO (Puplova). I found this to be very interesting. Central Banks lease their gold out so that they can take the money and invest it in income producing assets. The gold essentially gets sold short by the lesse's who must buy it back when "called" by the bank. Given gold's advance, the banks can now resell the gold and get a wee bit more money. I'm probably the last person on earth to have heard about this, but I found it interesting.
Michael Kahn wrote about the gold carry trade too.
I find the more I read, and the harder I try, the worse I do. Everybody's got a better strategy, a better backtest, a better portfolio, and the numbers to prove it. Maybe the answer is in one of your recent blogs, Roger--buy high quality stocks (e.g., JNJ), collect the dividends, and just never sell.
I have to agree with the high quality stocks idea; my largest holding recently has been AT&T, it's so much easier and less stressful to hold onto a solid company with a high yield such as T, in a big pullback like we had in August. You know the company's not going to fall of a cliff, that it will come back. Just added to BAC yesterday; similar story, very strong earnings, yield, not extended like a lot of the high beta superstars that get so much financial coverage, but can get wacked on a bad news story (looking at you GRMN).
anon 204 and alpha mike, you are not espousing the worst possible strategy by any means. Intending to hold certain companies very long term is very valid and I do it with client accounts but if you look back over long periods of times you will see that just about every stock that would get a seat at this table has cut in half (or close to it) and it could happen again.
This is not to dissuade the idea, again I do it, but to point out that this strategy is not immune to down a lot.
T and BAC will likely decline the most in a down move.
Rog baby, get a grip....
Swenson was not talking about selling individual stocks, he was talking about the mistake of selling asset classes when they are weak....
just as you did when you purchased the double short fund....
you panicked when the equity markets were weak, and now you are facing a huge 1 month loss on your double short fund.....
Swenson would argue that instead of panicking as you did, when the market dropped, you should have rebalanced, and purchased more equity exposure to keep your allocation to stocks level....
pay attention Rog, its not that complicated......had you followed what Swenson advocates, you would be far ahead right now...
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