Forum Archive Index - May 2000

[Nigel McCarter <n.mccarter@clear.net.nz>]

My tpw.
given the recent debate on stop loss ....
I've run some tests on rules based  on real data for trading and value stocks.
For the trading stocks I've taken five small cap companies, in diversified
sectors in the ASX
(AIE, LKO, MIV, MCP, AND MMN.)
If I bought a set amount of each stock in November last year, then:

1.  Buying and holding each of these stocks until May 2000 would have still
produced a capital gain 21%.  The capital value peaked at 130% at the end
of March.

2.  Applying a 10% stop loss rule (in other words selling the stock when
the price drops 10% from the preceding maximum, 
All shares would have been sold by the first week of December 1999 for a
trading gain (less brokers fees) of 15%.  By contrast the buy and hold
option had already produced 20%.

3.  Applying a 15% stop loss rule then all shares were sold by end of
January, preserving a capital gain of 55% (less brokers fees).  At the same
time buy and hold option had produced a capital gain of 90%.

Much the same story applies to four larger companies (MBL,CGH, BRL,QAN,).
QAN was chosen because of the apparent catastrophic share price collapse
following the announcement of the Virgin's plan

1.  Buy and hold produces an eventual overal  capital gain of 5.7% even
hanging onto QAN
2.  A 10 % stock loss rule eventually gets you out of the market in January
with a loss of 4.2%
3. A 15% stock loss rule leaves you in the market through to May with three
stocks but an overall loss of 5%


CONCLUSIONS
1. Stop loss rules don't work particular well
2. 10% stock loss rules rigidly applied will get you out of the market very
fast, all you will have is a stack of brokers fees.  The main driver being
that many stocks, particularly the smaller-cap smaller-price shares
routinely fluctuated by >10%
3. 15% stock loss rules are less sensitive to volatility, but they still
don't beat buy and hold.
4. Buying decent companies that are making money, and holding for the
medium to longer term is a much better way of preserving capital, creating
wealth and preserving sanity than following fad, fashion or fame.

Disclaimer:
I hold QAN, BCH, NUF, MBL,MIV,AIE,BRL AND MCP,MMN. 

Nigel 
Nigel McCarter
Safety Management and Information Services Ltd
Box 23 019 Hamilton
Phone 64 7 858 2429 Fax 64 858 2689
Mobile 02 212 4901

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