Forum Archive Index - May 2000

[jesse <johne777@hotmail.com>]

Hi Nigel
your post is really covering two topics, using v not using
stops.....and  short v long term investing. We should expand on your
numbers over a longer period with a broad and small cap index. Would be
interesting.

I think your info is inconclusive over such a short time frame. As Glenn
points out, you don't allow for reinvesting once you stop out. But lets
say you put proceeds in the bank. By May your small cap buy/hold is
beating 10% stop but well behind 15% stop.  (21% v 15% and 55%).
Larger caps return 5.7% v -4.2% and -5% is better, but the point is, the
stop has done the job.....restricting losses to 5% max is acceptable.

I would say stop losses work very well at restricting losses....what you
do with your money after you stop out is an entirely different matter.
I agree that 10% stops (or any other rule) rigidly applied don't work.
Stocks dont move up and down holding hands, each to it's own.
Buy/hold...nothing wrong with it.  With my buy/holds I like to
add...keep the winners and dump the losers because whatever trading
style you adopt, sooner or later you will pick a dog.
jesse






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


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