tight stop losses being triggered, page-16

Agree with you 100% Wanelad1... Someones point oif view below. Good article to read...

From time to time we're asked about stop losses. The idea of a stop loss is that if a stock falls by a pre-determined amount following your purchase, say by 10% or 15%, you sell it to prevent further losses. The effect is to limit your downside. It's a tool generally used by traders but less so by long-term investors. And there's a very good reason for that.

Traders are making an assessment not just of the value of a stock but also other investors' perceptions of that value, usually using charts.

Mispricing

The reasons why we do not use a stop loss are both philosophical and practical. Imagine buying a private stake in your local petrol station and then selling because someone walks in and offers you 10% less than what you paid for it yesterday. You wouldn't accept an offer like that in real life but on the stockmarket it happens regularly.

To our minds a stop loss policy suggests that the individual investor is happy to be convinced that he or she is wrong and the market is right. Sometimes that may be the case but in our experience many stocks can be mispriced for years. The dot.com boom was a vivid example.

And that's the way it's always been. We're inclined to hold on through the volatility, keep our transaction costs to a minimum and wait until the market recognises the value in a stock and prices it accordingly. And when it gets overpriced we sell it.

To trade through those periods of volatility with the aid of a stop loss requires far more time and expense than simply making your initial judgment on a stock, buying it, if you believe it to be undervalued, and then waiting for the market to price it fairly.

Now, a stop loss can save you money where your initial analysis is incorrect but generally it only serves to increase the size of your broker's wallet. What's more, if you're going to assume that your fundamental research is wrong every time a stock falls in the short term, why bother? Markets are not efficient all of the time.







And that's why value investing has proved to be a very successful long-term strategy. It's also much less demanding in terms of time and transaction costs. Collectively, we haven't met many rich traders or chartists but we do know plenty of wealthy long-term investors. Indeed, a glance at the BRW Rich List suggests as much.