My Investment Journey

[Julia]

Lots of FA reasons of why not to sell on a falling share price. Main one for me is that share price falls after something has happened. By the time I check the price (which I don't do often), the value has already been destroyed. At that point, I need to ask myself, is it the business that has changes, or is it a temporary setback? If the business is still the same (long term), this would be the worst possible time to sell. Bad news, depressed share price, etc. From FA point of view, depressed (temporary) earnings for a good long term business is the best time to buy, not sell.

You are limiting your focus to just the health of your chosen company, ignoring external macro factors.
If the whole market takes a substantial hit, not too many companies are going to escape.

You say above "share price falls after something has happened". OK. But at the beginning of a sustained event you still have the chance to protect your profits if you bought into an uptrend, or if you unfortunately bought at the top, to keep your loss minimal. To just shrug your shoulders at a fall of, say, 5% and say "too late to do anything now, it has already happened" makes no sense if you are properly aware of the surrounding conditions.

Having an automatic sell trigger, in my opinion, is the exact definition of not paying enough attention to this vital part of investing. I fully agree that sell decisions are just as important as buy decisions, and therefore just as much thought and analysis should go into them. Selling a company just because the price has dropped is just plain lazy (IMHO).

If you're going to use a pejorative like 'lazy' it seems to me more lazy to refuse to consider protecting your profits and your capital base.

It was from the highest point in 2008, the worst possible time you could enter the market, as the priced crashed soon afterwards.!

I bought those 16 stock in June 2008, when XAO was at around 6,000.

You have made two different statements above about your timing. The highest point was around 6800 from memory, so you bought into what was already a pretty clear downtrend.
What I don't understand is not only buying into that sharp downtrend, but doing so in the face of the widespread bad news globally which was giving every indication we were in for a quite rapid and sustained loss from which few companies would be spared.

If you describe yourself as a fundamental investor, surely this should encompass inclusion of the macro and external fundamentals that drive markets. Ignoring this was what lost so many people so much money.

If I had stop losses or other auto-sell criteria, I would have not only sold most of those stocks, but I would have sold them at the worst possible time.

If you'd had an appropriately placed stop loss your capital loss would have been minimal. By holding on through that huge downtrend you had a much longer distance to climb back up.

I would love to be able to do this, but I haven't seen anything to me convince me that I can time the market with a high enough degree of accuracy.

Perhaps because you have mentally resolved that you have evolved the perfect way to invest and are unprepared to consider ways to further improve your capacity to maximise profit.
I've never met anyone who consistently picks the exact bottom or exact top. It's not about that. It's about protecting your capital (and your profits, obviously) and keeping your losses small.

I am yet to see any examples that prove otherwise. All this is hard criteria that doesn't really need much human judgement. It should be easy to shut me up by providing sample of a 10 or so companies meeting this criteria where holding on to them for 10 years would prove to be a terrible investment....

No one has suggested holding any ten companies for any ten years would prove to be a terrible investment.
There are simply some suggestions being made in the spirit of explaining how you could be more profitable.
Up to you entirely whether you persist in the dogged belief that there is nothing more to learn or no ways to adapt the current approach to your advantage.

I'm completely puzzled by your apparently determined refusal to accept the idea of a stop loss. Can you explain the basis of this?

Yes when the share price falls after bad news, chances are the share price has moved lower than what your "value" would suggest - but this is the exact scenario where "investors" follow their stock to the graveyard.

Sometimes, in order to prevent a 90% loss, you take a 25% loss. Every now and then you'd take a false positive (or is it false negative) and sold on a temporary earning dip. But it happens and you move on. There will always be other opportunities to deploy your capital.

Not using a hard sell because it's too hard to think of one is not a very good excuse, nor very good risk management

+1.

 

[KnowThePast]

You are limiting your focus to just the health of your chosen company, ignoring external macro factors.
If the whole market takes a substantial hit, not too many companies are going to escape.

You say above "share price falls after something has happened". OK. But at the beginning of a sustained event you still have the chance to protect your profits if you bought into an uptrend, or if you unfortunately bought at the top, to keep your loss minimal. To just shrug your shoulders at a fall of, say, 5% and say "too late to do anything now, it has already happened" makes no sense if you are properly aware of the surrounding conditions.


If you're going to use a pejorative like 'lazy' it seems to me more lazy to refuse to consider protecting your profits and your capital base.

I agree. I have absolutely nothing against a theory of selling losers. I just disagree on doing it automatically. The same amount of analysis should go into sell/hold decision as into the buy decision.

You have made two different statements above about your timing. The highest point was around 6800 from memory, so you bought into what was already a pretty clear downtrend.
What I don't understand is not only buying into that sharp downtrend, but doing so in the face of the widespread bad news globally which was giving every indication we were in for a quite rapid and sustained loss from which few companies would be spared.

If you describe yourself as a fundamental investor, surely this should encompass inclusion of the macro and external fundamentals that drive markets. Ignoring this was what lost so many people so much money.

If you'd had an appropriately placed stop loss your capital loss would have been minimal. By holding on through that huge downtrend you had a much longer distance to climb back up.

Julia, this was a hypothetical scenario I ran to see what would happen to a "Buy and Hold great companies" strategies implemented with the worst possible timing. You'd have to be extremely unlucky, or dumb, to have invested all your money at once just weeks before a crash.

Perhaps because you have mentally resolved that you have evolved the perfect way to invest and are unprepared to consider ways to further improve your capacity to maximise profit.

I'm completely puzzled by your apparently determined refusal to accept the idea of a stop loss. Can you explain the basis of this?

There's definitely some truth to that. I've found what works for me, which is:
- as little "market watching" as possible.
- lots of searching, researching and learning.
- few decisions.

While I may be set in my ways, decision on stop losses is different. Really. I promise.

It is based on my experience, reading and running various long term back testing scenarios via my software.

I don't want to go and cite authority, but I will. Almost all value, long term oriented investors advise holding on to companies as long as their fundamentals meet their criteria, no matter what the market price is doing. All of them warn that large swings in share price are expected over time.

TA oriented investors, on the other hand, consider stop losses a must.

To me, a falling share price means that I need to strongly consider the possibility of being wrong, and quite possibly sell, but I am against automatic stop losses.

For a long term, fundamental investor, stop losses go against all the available knowledge and data. Doing back testing over any long term period on fundamentally sound companies, shows that they recover from price decrease a lot more often than not. And overall, stop losses will stop a lot more eventual winners than losers.

Now, if you are not any good at picking fundamentally sound companies, than stop losses may prevent a lot of self inflicted damage. But I think it is a band aid that does not fix the actual problem.

Do I think that I am great at picking these companies? No. But my solution is not stop losses. It is diversification and making sure I spend 2+ years entering the market rather than investing all my cash at once.

I feel this argument is going to a FA vs TA, which is something that never is going to be resolved. I think we'll need to agree to disagree on this one.

 

[galumay]

+1 to all of that KTP, I had drafted a reply earlier in the day but deleted it because I get the sense of this thread turning into a 'religious' debate of FA v TA. I am glad I deleted because your post is more eloquent!

 

[Julia]

Julia, this was a hypothetical scenario I ran to see what would happen to a "Buy and Hold great companies" strategies implemented with the worst possible timing.

You said

I bought those 16 stock in June 2008, when XAO was at around 6,000.

That doesn't sound like a hypothetical situation. You clearly say you bought 16 stocks in June 2008.

Earlier you said your point of entry was at the peak of the market which was some 800 points above.
I am simply commenting on some of your inconsistencies.

You'd have to be extremely unlucky, or dumb, to have invested all your money at once just weeks before a crash.

Yet that is what you clearly say above is what you did. In June 2008 you say you bought 16 stocks, right in the throes of a strong downtrend. If you clearly say this, it's reasonable to expect people to comment on that being what happened.

To me, a falling share price means that I need to strongly consider the possibility of being wrong, and quite possibly sell, but I am against automatic stop losses.

Fine, but also consider that by the time you (since you concede you rarely look at price action) realise the price has fallen dramatically, you have already incurred a considerable loss.

I feel this argument is going to a FA vs TA, which is something that never is going to be resolved. I think we'll need to agree to disagree on this one.

And there you have the classic end of discussion. There is no reason for there to be this artificial FA v TA divide. I'm about as far as you could get from clever understanding of TA. I believe in buying solid, fundamentally sound companies. I simply acknowledge that it's possible to combine something of both approaches in terms of timing which will protect your profits and your capital.

I imagine most of you engaging in this discussion have your share p/fs as a hobby, a side interest, while you generate a basic living from a salary. You would find it's an entirely different proposition if you had to generate a living from your capital. Then there's no room for such a cavalier attitude to accepting diminution of your asset base.

But again, I'll withdraw from this 'discussion'. When attitudes are so entrenched and there is the banal belief that there has to be an either/or approach re FA or TA, it's a waste of time and thought to try to extend the context in any way.

I wish you lots of luck.

 

[KnowThePast]

You said
That doesn't sound like a hypothetical situation. You clearly say you bought 16 stocks in June 2008.

Here is my exact quote: "I then had a look at the result I would have gotten if I bought exactly 6 years ago, at just about the market peak:". As well as a full paragraph before that clearly stating that I was running some simulated scenarios.

Earlier you said your point of entry was at the peak of the market which was some 800 points above.
I am simply commenting on some of your inconsistencies.

Yes, apologies - it was June 2008 and XAO at around 6000 in my original test. Doesn't really change the results or conclusions.

But again, I'll withdraw from this 'discussion'. When attitudes are so entrenched and there is the banal belief that there has to be an either/or approach re FA or TA, it's a waste of time and thought to try to extend the context in any way.

I agree Julia. But that's exactly what I am after, not a religious discussion that "one must use stop losses, because".

Theory is nice and I am sure we both can both cite plenty of authority figures arguing both ways.

What would be nice to see is discussion involving real life situations, or back testing to show that it actually works.

On my end, I have provided my investment selection criteria and have given data to show why I don't consider stop losses necessary for me. I haven't seen anything posted that disproves it, other than a list of companies that have gone under and which clearly didn't fit my investment criteria.

I agree that this conversation hit a dead end, so unless someones has some interesting data/anecdotes to share, that was probably enough of that.

I wish you lots of luck.

Thank you.

 

[brty]

For reference and accuracy, the all ords reached 6875 on 1st Nov 2007. On the 1st trading day in Jan 2008 the all ords closed at 6434. This was the worst day in 2008 to invest. On the 1st June 2008, the all ords highest price for the day and month was 5800. The lowest price in June 2008 occurred on 27th at 5265. It closed at 5335 for the month.

The all ords was between 1075 and 1610 points off the high point in June 2008.

I then had a look at the result I would have gotten if I bought exactly 6 years ago, at just about the market peak:

I look at my notes from 2008 and got a list of companies that I thought were top companies at the time.

If the reference is to 2008 as you indicate it is, then perhaps we need to look at 5 years ago not 6, or did you mean 2007?

The OP made that comment on 6th June 2013. The opening price of the all ords was 5635 and the closing price 5690 on 6th June 2008, over 1180 points below the peak.

it was June 2008 and XAO at around 6000 in my original test

This is not accurate. You are all over the shop on these dates and points. How on earth could you expect to get a whole lot of value analysis correct if points from your own history are that hard to get right?

I feel this argument is going to a FA vs TA,

No it is not. It always seems to be those from the FA background that bring this up when stopping your losses is concerned. There are others who buy and sell using FA, yet have clear exit or sell criteria. They are prepared to admit they made a mistake in buying something and sell at a small loss, instead of turning a small loss into a large one.

I do it all the time. I have the mindset that I might not know everything I should about a stock and therefore my analysis could be incorrect. It is far more logical than thinking that the market is wrong!!

TA can be used in any number of ways just like FA. The simplest form of TA is just noticing how the highs are getting lower and the lows are getting lower for a downtrending stock. When the cycle finishes and the highs start getting higher and the lows are getting higher, is a very easy signal to follow.

There is nothing wrong with buying on fundamental grounds, yet the signal is far easier to follow if the market is starting to agree with you when you purchase, ie the price is STARTING to go up. Why should the market turn around on a value stock, just because you bought it?? Why buy a "good" (your value criteria) stock now, that the market is rating as going down when you can, most of the time, wait for a much lower price AND the market to agree with you??

If the holding time is going to be years, then it is only logical to wait for the market to turn.

You bring up the topic of your first buy as CAB, state how it is the worst performer of your good companies over the last 6 years, but add how it has shown a return of 92.7% from 10 years ago with buy and hold strategy. Just by using a simple strategy of higher highs and higher lows on a weekly time frame, and the opposite for exit of the "good" company would have had you buying at $3 in 2003 and selling at $9 in 2008, plus keeping your money in cash ever since. That is a return of 200%. It is still making lower highs and lower lows as it has done since 2008. Perhaps your understanding of CAB is better than mine.

 

[craft]

And there you have the classic end of discussion.

I imagine most of you engaging in this discussion have your share p/fs as a hobby, a side interest, while you generate a basic living from a salary.

Do you really expect/want meaningful discussion to continue with this sort of comment?

 

[Julia]

Do you really expect/want meaningful discussion to continue with this sort of comment?

I stand by both comments. See Brty's remarks. The dogged insistence by many disciples of FA that anything to do with ensuring protection of capital by using stop losses means the person so suggesting is unmindful of the usefulness of FA and totally committed to a technical approach is as irritating as it is fallacious.

I usually stay out of these 'investment journey' threads where people with many aspirations but minimal experience describe their Holy Grail. I was, however, sufficiently irked by the OP's suggestion earlier that

Selling a company just because the price has dropped is just plain lazy (IMHO).

to challenge this.

 

[qldfrog]

galumay,



That is precisely what I meant by the market teaching bad habits. It works 'til it doesn't, then it costs you big time.

It seems to be a lesson that all new market participants have to learn the hard way.

and I agree fully with you, I do not enter without a very narrow stop loss
today 5 of my buy got out in the same day small loss but from previous experience not too bad a deal ...
now i need to not even enter these trades but based on my experience: stop loss is a MUST have
DYOR obviously

 

[So_Cynical]

and I agree fully with you, I do not enter without a very narrow stop loss
today 5 of my buy got out in the same day small loss but from previous experience not too bad a deal ...
now i need to not even enter these trades but based on my experience: stop loss is a MUST have
DYOR obviously

Hypothetically

If you were a long term trader/investor not using leverage, with round trip brokerage of $12 using a fixed position size of $1300 and a portfolio of 50 Aussie stocks and the $1300 position size was about 0.3% of your net worth...would you still say a "stop loss is a MUST have"?

Just wondering.

 

[peter2]

If you haven't already read this book, I think you might enjoy it.
Mathew Kidman: "Bulls, Bears and a croupier."

I'm not interested in FA but I enjoyed the commonsense analytical approach to identify investment stocks and reading what can go wrong.

(ps: Your PM is full.)

 

[KnowThePast]

Hi brty,

If the reference is to 2008 as you indicate it is, then perhaps we need to look at 5 years ago not 6, or did you mean 2007?

My wrong, well spotted. Yes, all tests are from June 2007:
XAO at 09/06/2007: 6258
XAO at 09/06/2013: 4776
Change: -23.7%
16 companies (same dates): +36.32% with dividends, 10.37% without.

No it is not. It always seems to be those from the FA background that bring this up when stopping your losses is concerned. There are others who buy and sell using FA, yet have clear exit or sell criteria. They are prepared to admit they made a mistake in buying something and sell at a small loss, instead of turning a small loss into a large one.

I do it all the time. I have the mindset that I might not know everything I should about a stock and therefore my analysis could be incorrect. It is far more logical than thinking that the market is wrong!!

TA can be used in any number of ways just like FA. The simplest form of TA is just noticing how the highs are getting lower and the lows are getting lower for a downtrending stock. When the cycle finishes and the highs start getting higher and the lows are getting higher, is a very easy signal to follow.

There is nothing wrong with buying on fundamental grounds, yet the signal is far easier to follow if the market is starting to agree with you when you purchase, ie the price is STARTING to go up. Why should the market turn around on a value stock, just because you bought it?? Why buy a "good" (your value criteria) stock now, that the market is rating as going down when you can, most of the time, wait for a much lower price AND the market to agree with you??

If the holding time is going to be years, then it is only logical to wait for the market to turn.

So, I should buy when there is a buy signal and sell when there is a sell signal. Have stop losses to prevent further losses.

Got it.

The only thing I am missing is where is FA in all this? To decide which which companies to trade in and out of?

The key part of FA is the assumption that there are sometimes discrepancies between market price and value. If I am going to be trading in and out on a signal, than what's the point of me doing all the FA analysis if I will ignore it anyway in case market changes price again in the future?

And that's what I meant by this conversation going into TA vs FA debate. The only argument I hear so far in favour of stop losses is that it will give me better opportunity to time the market and follow signals.

I won't argue which approach is better, I stick to FA because that's what I spent years learning and that's what has been working for me. Given the opposite nature of one another, I doubt I will ever invest the time required to learn TA properly.

What I am arguing, again, is that for an FA, long term investor such as myself, what's the point of stop losses? Considering that I do not trade on signals and have appropriate diversification?

Risk mitigation techniques usually have a cost, or limit upside. I consider myself sufficiently protected from a large loss with diversification and extended time to enter market. There's no reason for me to limit potential even further by using stop losses.

You bring up the topic of your first buy as CAB, state how it is the worst performer of your good companies over the last 6 years, but add how it has shown a return of 92.7% from 10 years ago with buy and hold strategy. Just by using a simple strategy of higher highs and higher lows on a weekly time frame, and the opposite for exit of the "good" company would have had you buying at $3 in 2003 and selling at $9 in 2008, plus keeping your money in cash ever since. That is a return of 200%. It is still making lower highs and lower lows as it has done since 2008. Perhaps your understanding of CAB is better than mine.

That analysis was to show how there's little risk as long as you invest in "good" companies, even if you buy them at any price at the worst possible time. As long as you buy enough to diversify and hold them.

The next key part is what price you pay for those "good" companies. That's why I bought CAB at $4 and didn't buy it at $9. Nothing to do with signals, it simply reached a point where I thought that I can buy future earnings of this business cheaper than anything else available. Or something like that.


Thanks for your advice brty, I really enjoyed reading some of your posts in other threads. I disagree with you on stop losses, for me, but hope you can continue reading and posting in my thread.

- - - Updated - - -

If you haven't already read this book, I think you might enjoy it.
Mathew Kidman: "Bulls, Bears and a croupier."

I'm not interested in FA but I enjoyed the commonsense analytical approach to identify investment stocks and reading what can go wrong.

(ps: Your PM is full.)

Thanks Peter, looks interesting. Just ordered it.

 

[KnowThePast]

I was, however, sufficiently irked by the OP's suggestion earlier that to challenge this.

Hi Julia,

Apologies if my comment about being lazy with stop losses offended you.

I agree stop losses are useful and are a must for some styles of investing.

But for me, for my strategy, I would consider myself lazy.

I try to learn about potential investments as much as possible, so that the decision of which companies to invest in should be almost mechanical, with little emotion. I feel I need to put in just as much effort into my sell decisions.

 

[Julia]

Know the Past: I congratulate you on your capacity to respond to some fairly robust criticism with civility.

 

[skc]

Know the Past: I congratulate you on your capacity to respond to some fairly robust criticism with civility.

+1.

Keep an open mind about how to approach the market. Not one approach is universally correct or most profitable...

 

[galumay]

Know the Past: I congratulate you on your capacity to respond to some fairly robust criticism with civility.

Agreed, I saw his response last night and nodded my head thinking it was a very mature response and one we see all to rarely online.

 

[tech/a]

Hypothetically

If you were a long term trader/investor not using leverage, with round trip brokerage of $12 using a fixed position size of $1300 and a portfolio of 50 Aussie stocks and the $1300 position size was about 0.3% of your net worth...would you still say a "stop loss is a MUST have"?

Just wondering.

Surely your simply going to mirror the index?
Your not going to out perform.

 

[So_Cynical]

Surely your simply going to mirror the index?
Your not going to out perform.

We really shouldn't derail this thread but, the out/under perform would come from the stock selection and entry/exit timing...while there would be a strong correlation to the index its easy to see how 2 or 3 good/bad selections could swing the portfolio either way.

 

[brty]

KTP,

I would firstly like to apologise for my over rigorous post earlier,

My confusion and terse comment stems from the following inconsistencies and those already mentioned.
By revising this thread I noticed that on 3 separate occasions you mentioned 2008, you now say it was 2007. I also came across the following from 2 separate posts.....

I then had a look at the result I would have gotten if I bought exactly 6 years ago

I bought those 16 stock in June 2008, when XAO was at around 6,000

hmmm....

Moving on..

 

[tech/a]

We really shouldn't derail this thread but, the out/under perform would come from the stock selection and entry/exit timing...while there would be a strong correlation to the index its easy to see how 2 or 3 good/bad selections could swing the portfolio either way.

Agree
But suffice to say even a 200% move up and 3 or so being delisted from 50 stocks and .3% of your net worth each trade.
Its going to be like watching paint dry.
Sure you can cut out stops and associated risk but at what cost?
If your happy with index performance fine.
But its not trading in my view.
Not really strategic investing either.