- Banks must improve – They need to boost transparency and accountability
- Hedge funds must improve – They need to reduce risks and costs
How? It’s a two step-process.
1. Speed – The market waits for no man
When the crunch first hit, many investors hemmed and hawed. Of course, hesitation can sometimes be a good thing. You don’t want to be making knee-jerk decisions.
However, one lesson othe crunch is that there are times when decisive action needs to be taken – and straight away! That’s why we’ve introduced a daily email service for Fleet Street Letter subscribers. That way we can stay in daily contact, and advise swift action should we deem it necessary.
2. Ruthlessness – Removing the emotion from decision making
As stated above, sometimes it’s good to wait-and-see. But sometimes it’s not. Trouble is, by the time you’ve found out it’s not, it’s too late.
What can be done about this?
Well, there’s no magic bullet. But at times like this, the trusty old stop loss can be an invaluable tool (invaluable because who knows the size of loss it could save you from in future).
Of course, in a volatile market, a stop loss can hinder you too. Set it too tight, and it’ll be triggered by virtually every stock in your portfolio – most of which will bounce back anyway. That’s what happens with a market that’s swining around erratically.
That’s why getting the level right is so vital. I’ve been doing some research into what is the best level (more on that below). I’ll be introducing stop losses in this week’s Fleet Street Letter, and saying what I believe is an appropriate place to set them.
What is a stop loss?
A stop loss is like an insurance policy. It is a price level for any investment at which our tips will, if reached, be automatically sold.
It prevents us from taking on big losers by cutting them off early. It’s a strategy that can turn our portfolio into a more ruthless, more efficient beast.
e.g:
- We tip Company ABC with a stop loss level.
- Company ABC reveals massive losses.
- Company ABC falls hard.
- The stop loss level, set by us, automatically sells the position and avoids any further loss
“When the ship starts to sink, don't pray. Jump.
“The inability to jump quickly off a sinking ship has probably cost more speculators more money than any other failing, and has undoubtedly led to the spilling of more gallons of tears than any other kind of financial misfortune.
“Getting stuck in a losing venture is the worst money pain there is. When the ship starts to sink, don't wait until it is half submerged. In all cases, the idea is to cut losses early.
“You take small losses to protect yourself from big ones. Some [investors] prepare for small losses in advance through use of stop-loss orders.”
“The main advantage is that such an order saves you from the agony of deciding when to sell.”
However, like any investment rule, this is not a solution to all of the market’s ills.
The impact of market volatility
We are currently experiencing a fiercely oscillating market. Many shares within the FTSE 100 index have fallen by more than 20% from recent highs, putting them into official bear market territory.
Shares in other indices hit the bear indicator even sooner. Introducing a cut-off point when the market is so volatile is tricky.
Get the stop loss level right and you can protect your wealth from obliteration.
No number of rules and criteria are a substitute for good decision making.
Nonetheless, as Max Gunther's tale demonstrates, the stocks that lose you money are only rarely the ones that make it back up for you.
We will be expanding on and explaining the rules for our stop loss policy in this week’s Fleet Street Letter.
To become a subscriber, visit our information page.
Best wishes,
Theo Casey P.S. If you enjoyed this article then we encourage you to sign up for The Fleet Street Letter. Get contrarian, cutting-edge analysis for sensible, long-term investments that secure you high growth and healthy dividends.
