Beginning an Investment Journey...

[skc]

I have however become absolutely convinced that the entry must be made on the basis of price. Firstly, as most FA/value investors will agree, the price must be at a discount to their judgement of where fair value lies. I think this is implied even though you suggest one can purchase a stock without regard to its price.

Timing entry based on technical analysis, which I think is what you are alluding to, for me is imperative even though I choose stocks based on FA.

I think you misunderstood what Craft and I were trying to say. There is certainly noting wrong about making an entry at the most advantageous price, and it's perfectly OK to time your entry on whatever TA method one deems useful.

But ultimately the decision to buy XYZ was based on the company's prospects (may be low PE, may be high growth, may be special event). Timing your entry using TA doesn't make it a "price based" entry. Or more correctly, price-action based entry.

So it makes no sense to exit based on price action (i.e. 20% stop loss or whatever). You should exit when earnings fall, or growth does not eventuate, or event no longer offer the right reward/risks.

As for exiting based on price, every man has his price. Just as when I am willing to buy based on my belief that the price is at a discount to fair value, why wouldn't I exit when I believe the price is at a significant premium to the fair value? Why wouldn't I use a stop loss to lock in capital gains and preserve capital?

When you exit because price has reach a premium to fair value... that is NOT what I deemed price-based exit. It is valuation-based exit and it's exactly what one would do.

As to price-action based stop at a loss for capital preservation - there are other ways to manage risk, with the three key pillars being position sizing, expertise in research/analysis and margin of safety.

If I think a stock is a bit riskier though, then I'll set the stop loss tighter - I shouldn't have too many of those, but the option is there.

What does it mean when the stock is riskier?
Doesn't it mean it is more likely to have larger volatility in price?
So does it make sense to have a tighter stop loss?

On a riskier stock a tighter stop loss will only whipsaw you out of position easier. You don't give the stop the opportunity/time/space to work out. If you want to enter a riskier stock, you need wider stop (if it must be price-based). And the way you manage risk is by having a smaller position.

Say I am buying a biotech company with a potential blockbuster drug approval in 3 months, yet if such approval is denied the share price can fall up to 60%... you size your position based on a 60% loss being an acceptable amount to lose. E.g. You want to risk $600 on this so you can only buy $1000. Don't go and buy $5000 position and have a 10% stop. It will be a complete waste of money.

Many newbies will say "$1000 position will only make me not a lot of profit"... but looking at reward before/without looking at risk with the same objectivity is the downfall of most investors/traders.

Chew on this for a bit more until you have a good understanding of the difference between price based stop (which is what you are proposing) and what Craft and I are saying.

 

[Trembling Hand]

What does it mean when the stock is riskier?
Doesn't it mean it is more likely to have larger volatility in price?
So does it make sense to have a tighter stop loss?

On a riskier stock a tighter stop loss will only whipsaw you out of position easier. You don't give the stop the opportunity/time/space to work out. If you want to enter a riskier stock, you need wider stop (if it must be price-based). And the way you manage risk is by having a smaller position.

Say I am buying a biotech company with a potential blockbuster drug approval in 3 months, yet if such approval is denied the share price can fall up to 60%... you size your position based on a 60% loss being an acceptable amount to lose. E.g. You want to risk $600 on this so you can only buy $1000. Don't go and buy $5000 position and have a 10% stop. It will be a complete waste of money.

Many newbies will say "$1000 position will only make me not a lot of profit"... but looking at reward before/without looking at risk with the same objectivity is the downfall of most investors/traders.

Chew on this for a bit more until you have a good understanding of the difference between price based stop (which is what you are proposing) and what Craft and I are saying.

Glad you posted that. Saved me finishing what I was about to start.

I'd still like to see the "plan". It will no doubt be riddled with this kind of nonsense.

 

[tinhat]

I think you misunderstood what Craft and I were trying to say...

Thanks for your clarification.

 

[craft]

I think you misunderstood what Craft and I were trying to say. There is certainly noting wrong about making an entry at the most advantageous price, and it's perfectly OK to time your entry on whatever TA method one deems useful.

But ultimately the decision to buy XYZ was based on the company's prospects (may be low PE, may be high growth, may be special event). Timing your entry using TA doesn't make it a "price based" entry. Or more correctly, price-action based entry.

So it makes no sense to exit based on price action (i.e. 20% stop loss or whatever). You should exit when earnings fall, or growth does not eventuate, or event no longer offer the right reward/risks.



When you exit because price has reach a premium to fair value... that is NOT what I deemed price-based exit. It is valuation-based exit and it's exactly what one would do.

As to price-action based stop at a loss for capital preservation - there are other ways to manage risk, with the three key pillars being position sizing, expertise in research/analysis and margin of safety.

And I'm glad you posted that as well. Saved me finishing what I was about to start

 

[lenny]

Hi vader,

If you haven't tested your strategy how far of a drawdown do you go into before you concede your strategy doesn't work? 20% or 30% or 40%?

Lenny

 

[Trembling Hand]

Hi vader,

If you haven't tested your strategy how far of a drawdown do you go into before you concede your strategy doesn't work? 20% or 30% or 40%?

Lenny

When the wife loses 100 % confidence in your ability to repay the debt with "investment" gains. :whip

 

[Vader]

When the wife loses 100 % confidence in your ability to repay the debt with "investment" gains. :whip

Got it in one, lol...

I hear what you're saying about a priced based stop vs a fundamentals based stop, and yes I agree a fundamentals based stop is better (and in some cases will get me out earlier, so using both is probably a good thing), but using only fundamental based stops doesn't allow for the possibility that you may have been wrong in the first place. Hopefully research will have turned up some looming disaster that everyone seems to know about except me, but I know that's not always going to be the case. Even if it's just a momentum based move, I'd rather bail out at an acceptable level and cut losses and sit back for a bit - sure, it might start to recover the second I hit sell, but it's just as likely to drop further.

 

[CanOz]

If i could contribute something of value here to help you then i would like to recommend that you at least try to incorporate some kind of a filter to keep out of trouble when the inevitable market downturn happens....

Perhaps you could use an index, such as the VIX, if the VIX is above a certain level (the bear market barometer) then you go to cash?

Also, have you thought of giving your system an slight edge using seasonal biases?

You could sell in May and buy in November, as an example.

CanOz

 

[tech/a]

Done a few years research and testing stops. Based on Purchase price. INITIAL STOPS.

(1) 13-20% most trades dont get stopped out at this level (+50%) but what you do get is many which become stuck in no mans land where your below your stop but not in profit!--or swing in and out of profit
.
(2) Less than 8% higher stop out rate some 50% + But greater oppotunity.More trades.

(3) 8-12% the sweet spot ---where there seems to be a balance with being stopped out too early and wide enough to give it room.

Remember that if you split your capital into 10 lots then a 20% hard stop is a 2% risk.
20 Lots 1.
Not that thats how I would position size but is one method. I used it for techtrader.

 

[CanOz]

Done a few years research and testing stops. Based on Purchase price. INITIAL STOPS.

(1) 13-20% most trades dont get stopped out at this level (+50%) but what you do get is many which become stuck in no mans land where your below your stop but not in profit!--or swing in and out of profit
.
(2) Less than 8% higher stop out rate some 50% + But greater oppotunity.More trades.

(3) 8-12% the sweet spot ---where there seems to be a balance with being stopped out too early and wide enough to give it room.

Remember that if you split your capital into 10 lots then a 20% hard stop is a 2% risk.
20 Lots 1.
Not that thats how I would position size but is one method. I used it for techtrader.

Well at least we are starting to QUANTIFY his possible risk now...that's a great start!

I still shake my head when i remember that its not your money Vader...sends a chill up my spine. Why is it again, that you cannot wait until you have cash to invest? Fear of missing out?

CanOz

 

[peter2]

Naturally I differ from my fundamental colleagues on their preference for a fundamentally based exit over a price based exit. No matter how much work to put in to learn about a company you will never know as much as the specialists who analyse the company for financial organisations. The longer term financial investors will sell down their holdings months before any news is released to the market. They will sell their large holdings on "good" news. Astute chartists may notice this reasonably quickly as will a retail investor using a price based exit. At the very least the price based stop should be an early warning indicator that all is not well at the company. Further research and commonsense can determine if the bad news is temporary or toxic. All types of exits will be stated in your plans of course.

A few have suggested (skc especially) quite wisely, to consider small position sizes as a form of risk management. Smaller sizes mean you can use very wide exit stops. Your suggested maximum of 15% in one stock would send a few shudders through the more experienced investors. My max size as a trader is 15% but my hold time is only a few weeks. I would imagine a core holding of an investor may get to 15% after many years of incremental buying and price appreciation.

It's definitely all about the plan, which is never perfect. You will be modifying it constantly as your understanding and experiences evolve.

 

[ENP]

How many annual reports have you read?

Do you know what you want to look for in a company?

I read a quote by Buffett saying if you can't handle a 50% or more decline in your portfolio then you shouldn't be investing in stocks. You say you want to be a long term value investor but then you have a 20% stop loss? Meaning you will lock in a sell when a value investor should be buying. You also said you would sell when you reach a certain % increase in your stock. Why limit your upside like that?

 

[Julia]

Has the OP actually declared himself a 'value investor'?
Plenty of successful TA followers who never look at a company report.

 

[Trembling Hand]

You say you want to be a long term value investor but then you have a 20% stop loss? Meaning you will lock in a sell when a value investor should be buying. You also said you would sell when you reach a certain % increase in your stock. Why limit your upside like that?

Because he hasn't a clue what he's doing. Clearly. But we shouldn't really be too upset. After all its the continual stream of new funds that make it possible for the experienced to stay and make money.

 

[McLovin]

Has the OP actually declared himself a 'value investor'?
Plenty of successful TA followers who never look at a company report.

Not explicitly but he did infer it in the OP.

Value investing makes sense to me

 

[robusta]

Because he hasn't a clue what he's doing. Clearly. But we shouldn't really be too upset. After all its the continual stream of new funds that make it possible for the experienced to stay and make money.

Nothing like giving him a chance, why dont you wait to see his strategy and execution before declaring he has no idea.

 

[Trembling Hand]

Nothing like giving him a chance, why dont you wait to see his strategy and execution before declaring he has no idea.

He has already stated his going to leverage his home and forward test his unproven "plan" which from the little we have seen he's all lost at see as far as stops and position sizing. Yet to see anything that is a sound plan.

My point stands because of what I have seen.

 

[Julia]

... BUT I also doubt I will be able to resit one or two more 'speculative trades'. The potential damage will be kept very low for those and be based around an upcoming catalyst, but I do need a few rules about how to handle those.

...and yes, I'm sure I won't avoid a bit of basic TA, and I agree it's going to be more touchy feely than definitive edge, but once I've identified a stock with good financials, that represents what I believe to be good value, I'm not going to just jump in at the first available point and continue to ride a downward trend even lower.

I haven't read through SKC's Fundamental thread yet (I missed that one somehow, will read it today), but yes, supply v demand is certainly something I understand - another simple indicator I have noticed after looking over heaps of charts and their performance over the last year or so is that when the 5d moving average climbs above the 30d moving average (and the 30d moving av is trending upwards), there is usually a decent period of growth that follows.

using only fundamental based stops doesn't allow for the possibility that you may have been wrong in the first place

How many annual reports have you read?

Do you know what you want to look for in a company?

I read a quote by Buffett saying if you can't handle a 50% or more decline in your portfolio then you shouldn't be investing in stocks. You say you want to be a long term value investor but then you have a 20% stop loss? Meaning you will lock in a sell when a value investor should be buying. You also said you would sell when you reach a certain % increase in your stock. Why limit your upside like that?

Not explicitly but he did infer it in the OP.

OK. But, as someone else has pointed out, Vader's language is definitely not exclusively that of the fundamentalist.

I don't care one way or the other. I think it's nuts to be experimenting with borrowed money, especially when there doesn't appear to be a clear plan.

But essentially I was just responding to the rather aggressive tone of ENP's post above, and defending Vader's right to not be a fully committed fundamentalist, if you like.
That's all.

 

[McLovin]

OK. But, as someone else has pointed out, Vader's language is definitely not exclusively that of the fundamentalist.

I don't care one way or the other. I think it's nuts to be experimenting with borrowed money, especially when there doesn't appear to be a clear plan.

But essentially I was just responding to the rather aggressive tone of ENP's post above, and defending Vader's right to not be a fully committed fundamentalist, if you like.
That's all.

Fair enough. And I agree about using borrowed money, especially with a long term style FA strategy.

I kind of zoned out of this thread but I will be interested in seeing how Vader gets on.

 

[So_Cynical]

He has already stated his going to leverage his home and forward test his unproven "plan" which from the little we have seen he's all lost at see as far as stops and position sizing. Yet to see anything that is a sound plan.

My point stands because of what I have seen.

Investing with a reasonable degree of success is not rocket science, not even close...plans will evolve, he will find out where his comfort zones are, what works for him and what doesn't....all people need to learn by doing...books, study and thinking will only get you so far.