Stops are for wimps

[Karel]

When somebody on this board mentions the word stop, the effect is hardly less spectacular than when Moses commanded the waters of the sea to divide. As in that case, the most comfortable place to be is in the middle. Sometimes stops are useful, sometimes they are the opposite. Some stock trading strategies wouldn't work without stops, other trading strategies stop working with stops. Broadly speaking, the technical, chart pattern people need and love stops, and the value people couldn't care less. Do you see Warren Buffet placing a stop? Let alone the HUGE One?

There is just one justification for stops: that they work. If they don't, forget them. So, do stops work with $$$MrMarket$$$'s method? My brother pointed out that in his 50 odd closed trades, only 5 would have been stopped out at -20%. Wouldn't that be more than compensated by avoiding huge losses (read BEL, PRX, NUTR, and perhaps also CBK)? Time for some calculations.

I started with the info on http://hometown.aol.com/ebarsamian/ as per november 15, 2004. I valued all closed positions at +15% and the open positions at their then current return. The average return per position is 6%.

Watch out, the normal or arithmetical average is 8.6%, but we need the geometrical average. The normal average is calculated as (15%+15%+...)/(number of returns); the geometrical average as the (number of returns)th root of (1.15*1.15*...).

It is moderately obvious that a tight stop, like the -8% often mentioned, is no good for $$$MrMarket$$$'s method. Quite a few stocks would be stopped out, hurting the returns awfully. So what about a wide stop like the -20% proposed by my brother? It would mean that from the 62 winners since January 2002, 11 would have been stopped out. That is awful, but the open positions compensate. Only 2, SPF and MCRI, would be open; the rest would add a -20% loss, for an average loss of -16.4%, compared with the current -26%. But the compensation is not enough: the total average return drops to a paltry 2.9% per position. I also tried a still wider stop, of -33%, but while better, it still doesn't cut it. The average return per position is 3.8%, which just doesn't compare with 6% for no stops at all.

Conclusion? Stops have no place in $$$MrMarket$$$'s method, not even to avoid the occasional stock going bust. And if you are a wimp and can't face the red in your positions? Put your money in a savings account, or, better still, get some spectacles with red tinted glasses, so the red numbers become invisible.

Regards,

Karel

[mrmarket]

Karel,

Great analysis.

Might I add...

* The reason I have a up to 14 stocks in my portfolio allows me the luxury of taking a hit in a stock without seeing my entire net worth rubbed out. That's called "diversification" which is a more important tool in mitigating losses than using stops ever will be.

* If you are a technical trader, who knows nothing about what you are buying, then you can't trade without stops. If you are $$$MR. MARKET$$$, who uses technical, quantitative AND fundamental analysis in stock picking, then you know EVERYTHING about a stock, and stops are, therefore, useless.

[billyjoe]

Karel,
So Mr.Market is right again. This is going to affect my investing theories. It looks as if superior stocks are picked in the first place, the tanking of a handful in a diversified portfolio will be offset by the gains of the majority. Looking back over the last 2 years, BEL was the only one of my purchases that bit the dust, the majority did very well, unfortunately I sold about 8 of them prematurely to avoid the big loss. Now I only have one major difference with MM. In my opinion he sells too soon! I'd jack the 15% sell point to about 18%. Notice how many Mr.Market picks when they take off can't be sold for just a 15% gain, they're going up in price as MM is clicking on the "sell" icon. Karel, your analysis should quiet the attackers on the IBD forums for a while.
billyjoe

[billyjoe]

Karel, You probably would know the answer to this. I just noticed that the special dividend of 3.00 per share for MSFT is payable to shareholders as of close Nov.17th , however , the 3.00 was deducted from the share price at the opening Monday Nov.15th. If a shareholder had a stop order in that kicked in after the 3.00 drop they'd be screwed twice losing on the price and the dividend. I'll bet this happened to lots of people . Just think if you held about 10,000 shares. Is it possible? Thanks, Karel, and keep up the good work.
billyjoe

[mrmarket]

Karel is a genius...and he knows English better than I do. $$$MR. MARKET$$$ would be $$$MR. TOAST$$$ without Karel.

[Karel]

Karel, You probably would know the answer to this. [...] If a shareholder had a stop order in that kicked in after the 3.00 drop they'd be screwed twice losing on the price and the dividend. [...] Is it possible?
Hi billyjoe, I always get confused by ex-dividend dates too. But I googled and found http://www.sec.gov/answers/dividen.htm

So the answer is no: when you hold the stock and sell on the ex-dividend date, you still get the dividend. I hope I don't forget it again.

Regards,

Karel

[MEA_1956]

FWIW I sold HDI Last Spring and later found the div. deposited into my account. So what is a boy to do with $3.28. Sell it and pay the price or just let it ride. We shall just let it ride. ===> M. E. A.

[spikefader]

Interesting thread title Karel; no doubt designed to be controversial and provocative enough that all readers at this site will be enticed to enter and read, and hopefully LEARN where stops fit in to trading and Mr. Market's system. But I think I should chastise you for the misleading nature of the title, since the contents of your post clearly doesn't gel with it.

The fact is, properly used stops in the right system are for legends! It's all a matter of perspective. It would be like me writing a thread entitled, "Mr.Market's system is for wimps", and then write about how it works in the right circumstances and fails in other circumstances. Mr.Market's system clearly DOES work if you're diversified with 14 positions and don't use stops. But if you're not diversified and don't use stops, you're going to 'do your ass' and lose your money. If I wanted to write a thread like that, a more fitting title would be something like, "Mr.Market's system works if you do XYZ".

..the effect is hardly less spectacular than when Moses commanded the waters of the sea to divide..
I agree....discussion of stops is just like discussion of politics or religion - divided opinions. And we all know what to think of opinions.....they're like ass holes......everyone has one. And other people are ones :D

OK, so it seems fairly clear that stops will kill you with the HUGE ONE's system. And as Mr. Market brilliantly points out in his reply, that diversification is key to his success, and gives him the luxury of being able to laugh in the face of the BEL's in his portfolio (for the uneducated BEL is a disastrous loser since his purchase of it). The BELs don't matter! and he'll never close the positions and therefore never 'lose'! His other picks that win for him make up for the difference in an above-average way, and not only THAT, but he gets the often-contested bragging rights of having an enormous string of winners in a row. Not only is it fantastic for his ego his psyche but delicious food for thought for those investors who can't time entries in a technical way, or lack the self-discipline to achieve success through other sensible money management trading techniques.

And what of those other non-Mr.Market systems?? What do stops do for them? Well obviously the answer to that is the same as how long is a piece of string. It depends. It depends on many factors, not the least of which are overall win percentage and risk-reward blah blah blah. Karel points out sometimes stops are actually useful (and seemingly not for wimps) ....... but he leaves us no further info on that tidbit. Perhaps he has seen other systems actually work with stops?? I know I have, and can testify to it. I've seen real-time demonstration of TA based systems that employ stops work wonderfully when trading the emini futures. And I've seen stock trading systems demonstrated to be profitable real-time whilst employing stop loss orders. Some of these systems have been based on TA indicators and others purely on tape-reading time & sales data at support and resistance levels.

So I guess my closing thoughts are these: If people are going to follow MR.MARKET's system, they'd sure as heck better be diversified with a dozen or so positions or else get killed by only one or two unprotected long positions that fail to perform. And if they're not diversified, then use stops. It doesn't make you a wimp, it makes you smart and disciplined, and headed for success. Eventually you will nail an entry that won't stop you out, and you can let a trend take it to profitability, rather than letting a downward trend spiral you to oblivion. It's the winners you should let run, not the losers.

[mrmarket]

I'd like to add that if people can only pick winning stocks at a 50% rate, then they should probably use stops, even if they are diversified.

[Websman]

I'm guessing that, in order to trade exactly like Mr Market, one would need a portfolio worth, at least $100,000. this would give you around $8,300 per trade. I would consider this a minimum amount.

I think Mr Market has a great system! some of the folks on the IBD boards may not like him, but they all seem to have their panties in a wad anyways.

I think we have a great bunch of folks here. I've learned a lot from traders who all trade in different ways. This is the greatest investment board going!

Stops? It's your money...Use them if it works for you...

[mrmarket]

I think we have a great bunch of folks here. I've learned a lot from traders who all trade in different ways. This is the greatest investment board going!



This doesn't mean we will all be taking warm showers together or be holding hands singing kumbaya.

[Websman]

This doesn't mean we will all be taking warm showers together or be holding hands singing kumbaya.

ahhh...why not???

[IIC]

I don't like stops and I don't like IBD Forums...but I like everyone here whether they use stops or not...IIC

[Michaelk005]

I'm not a huge fan of stops myself. The reason being is that I will only buy into a stock with the complete and full understanding that this current stock meets my every trading system detail and will rise. If I put a stop loss order on it, im already expecting it to fail. There are the odd occasions when you are dipping into a looming or very risky sector. As for Mr. M's system, it works for him. He seems to have the patience to wait for reversals on his securities even if they take more then 6 months. I would venture to say that he has; since his first investment made money and will continue too since he can wait and see outside the bubble. There are 1000's of readers and inactive posters on this site looking for the next free hand out to a winning stock. My advice,, take the best thing Mr. Market has taught you so far...PATIENCE>>

[Karel]

Hi Spike, you are right: the contents of my post are much more nuanced than the title, which was meant as an attention getter. It is only true with an addition like: When you follow $$$Mr.Market$$$'s system.

I have no experience with stops. The successful strategies with stops that I had in mind, were your strategy (it is successful, isn't it?), CANSLIM (with its following it better be successful), and the turtle traders http://www.originalturtles.org/

I think your last paragraph is perhaps a bit mixed up. For $$$Mr.Market$$$'s system stops damage your returns. Period. When you use stops as protection against the occasional lemon, you run a much greater risk of a streak of smaller losses that throw you out of the game. That makes investing look too much like gambling in my eyes. Of course you may have another strategy in mind here, and your "It's the winners you should let run", makes that probable.

There is only one way to invest your money in a responsible way with $$$Mr.Market$$$'s system, and that is by diversifying. If you can't do that, don't think about it. And I don't think you need $100,000 as Websman supposes. (But it is always nice to have so much money to play with.) Start with 8 positions, allow 1% slippage for commissions, pay $10 commission per transaction, and you need only $16,000. Allow 2% slippage on a round trip and you need only $8000. But that's about it. With lower commissions you need proportionally less, with higher, more.

I am not opposed to stops on principle. Not even in combination with $$$Mr.Market$$$'s system. But fixed stops just don't seem to work. Perhaps sliding or trailing stops will work, who knows. Just show me the numbers. Until then: what's good enough for $$$Mr.Market$$$, is good enough for me.

Regards,

Karel

[spikefader]

Hi Spike, you are right: the contents of my post are much more nuanced than the title, which was meant as an attention getter. It is only true with an addition like: When you follow $$$Mr.Market$$$'s system.

I have no experience with stops. The successful strategies with stops that I had in mind, were your strategy (it is successful, isn't it?), CANSLIM (with its following it better be successful), and the turtle traders http://www.originalturtles.org/

I think your last paragraph is perhaps a bit mixed up. For $$$Mr.Market$$$'s system stops damage your returns. Period. When you use stops as protection against the occasional lemon, you run a much greater risk of a streak of smaller losses that throw you out of the game. That makes investing look too much like gambling in my eyes. Of course you may have another strategy in mind here, and your "It's the winners you should let run", makes that probable.

There is only one way to invest your money in a responsible way with $$$Mr.Market$$$'s system, and that is by diversifying. If you can't do that, don't think about it. And I don't think you need $100,000 as Websman supposes. (But it is always nice to have so much money to play with.) Start with 8 positions, allow 1% slippage for commissions, pay $10 commission per transaction, and you need only $16,000. Allow 2% slippage on a round trip and you need only $8000. But that's about it. With lower commissions you need proportionally less, with higher, more.

I am not opposed to stops on principle. Not even in combination with $$$Mr.Market$$$'s system. But fixed stops just don't seem to work. Perhaps sliding or trailing stops will work, who knows. Just show me the numbers. Until then: what's good enough for $$$Mr.Market$$$, is good enough for me.

Regards,

Karel
Hi Karel :)

Thanks for that. Another good post.

Not sure I could ever understand how using protective stops could make investing more like gambling, but I respect your opinion anyway. Maybe the source of confusion is the way you look at entries as 'investing' and I look at entries as merely 'trades'. I guess this will always be the fundamental difference between purely FA-based trades and purely TA-based trades.

Good work drilling down on the responsible way of trading Mr.Market's system. That topic should be an entire thread of its own imho! Because I fear there are some who take only a few of Mr.Market's trades and do not properly diversify, which leaves them overexposed and in a precarious position - whether it be gamble money for them or their serious investing money. It is a very alluring thing to see "62 winners in a row" boasted, and it could easily lure naive people to feel a false sense of security about the chances of succeeding with an undiversified portfolio. I say all this not to criticize anyone, but to caution the unlearned and inexperienced readers. This caution applies to every system that people might see shared on the Net. No matter what system one follows, whether FA or TA based, risk must be DEFINED and LIMITED, whether by using stops or proper portfolio diversification.

Actually, I'd really like to know how many people there actually are that follow Mr.Market's system and ARE undiversified and not using stops. Maybe a poll would reveal the number. And if the interest exists, perhaps I'll put some thought into developing an offshoot system that takes Mr. Market's calls, but only the most extreme low-risk entries, such as intraday S2s. Once a position is open, use tighter target rules like R2 targets, and sensible low-risk stops, and then only look to catch a swing trade for whatever percentage the market gives, as opposed to holding for a flat 15%. These trades would be more support/resistance based swing trades.

How big would the percentage win be? I was surprised to see that MCRI today shows an impressive 14.8% profit possibility. S2 is 34.84 and R2 is 40.00. Admittedly, it seems like it would be pretty uncommon for a stock to fall to S2 then bounce to R2 in a single day, but it is at least possible!. A more likely event would be price falls to S2, then meanders over the next couple days to an R2, which by then may have dropped several points due to the intraday price action, which of course modifies the fib numbers.

Just thinking about it, it's aroused my curiosity and I think I'll do it anyway. Here's what I'll do. I'll take the latest Mr. Market pick, and take automatic intraday S2 entries when and where they appear, and take profit at the very next intraday R2 (probably a couple/several days). I'll repeat this process of swing trading that pick, until Mr.Market's next pick, or his target is reached. For protection, I'll use stops, and I'll look to drill down on the specifics of that after more thought. I'm thinking maybe something mathematically definable like STOP=(S1-S2)x2, which will make it consistent, easy to calculate and leave discretion and emotion completely out of it.

If nothing else, it will be fun to watch how Mr.Market's picks behave relative to intraday Fib supports. Maybe we'll all learn something useful from that....

I'll post the charts, entries/exits in my thread for anyone that's interested in following it.

[scifos]

I don't hold 14 stocks at once, usually 5-7, which I know is not diversified. Personally, I don't really worry about diversification. I don't strictly follow MrMarket picks, I pass on some and buy some, I buy other stocks too. I would say my strategy is similar, but not the same as MrMarket's.

I used to not use stops, mainly because I was new to the game. Now I have trailing stops on all my positions and I try to tailor each stop to the stock (ie its volitility, price range, etc) but have gotten stopped out of some good ones (URBN the day before it announced great earnings). I will admit that I am still very weak on picking good entry points and stops, but I take a similar approach to that as MrMarket in that if I pick a good stock then the entry price is not absolutely crucial (although it can be very helpful to nail the right entry).

[Websman]

There is only one way to invest your money in a responsible way with $$$Mr.Market$$$'s system, and that is by diversifying. If you can't do that, don't think about it. And I don't think you need $100,000 as Websman supposes. (But it is always nice to have so much money to play with.) Start with 8 positions, allow 1% slippage for commissions, pay $10 commission per transaction, and you need only $16,000. Allow 2% slippage on a round trip and you need only $8000. But that's about it. With lower commissions you need proportionally less, with higher, more.

Regards,

Karel

Ok, so I supposed wrong...lol

[Karel]

Not sure I could ever understand how using protective stops could make investing more like gambling, but I respect your opinion anyway. Maybe the source of confusion is the way you look at entries as 'investing' and I look at entries as merely 'trades'. I guess this will always be the fundamental difference between purely FA-based trades and purely TA-based trades.
Yes, that may be part of it. And indeed, stops have "protection" written all over them. You could see them as an insurance premium against an insufferable loss.

Now we have seen that the premium is more than the loss it saves you from if you are properly diversified, when you follow $$$Mr.Market$$$'s system strictly. My gambling analogy becomes valid when people don't have the capital to be properly diversified. That also means that they will run into the wall really fast; they don't have much elbow room. If a person invests in one stock and has lost 1/3rd in 10 trades, and didn't have a lot to begin with, I consider that as burned. Out of the game. This doesn't work. I did 20,000 runs where I picked 10 random stocks out of Ernie's 76, and 13.7% of those runs dropped below 66%. What about the 20% stop? 15.2% of the runs dropped below 66%. OK, let's call it a tie. But it isn't protection either. Yes, the losses are limited, so the 13.7% show greater losses on average than the 15%. But you run a 1 in 7 chance of failure either way. I call that gambling.

I almost didn't look at the 8% stop, as the average gain is hardly enough to make up for slippage in small positions: 2%. But here you are right: only 2.7% of the runs drop below the "unacceptable" level. But the average gain per round trip excluding commissions is 2%, so practically speaking you pay the price for protection against the unmentionable by standing still when you are lucky.

If you don't want to gamble, get enough money to be able to diversify properly. If you want to follow $$$Mr.Market$$$'s system, that is.

Regards,

Karel

P.S. By all means start a new thread for your analysis of the picks, if you like that better! I would prefer that, as things might get mixed up too much in one thread. And yes, I would be very much interested.

[Karel]

P.P.S: I did a recalculation where the "investor/trader" gave up as soon as the loss became more than 33%. The percentages of the runs where the loss became "intolerable" then became:
$MM$ - 18.8%
-20% - 24%
-8% - 10%The conclusion remains the same

[dmk112]

If you don't use stops you're gambling with your money. No more to it.

[Websman]

If you don't use stops you're gambling with your money. No more to it.


I love gambling! It gives me a rush.

[dmk112]

I love gambling! It gives me a rush.

Yea me too but only if im winning

[mrmarket]

If you don't use stops you're gambling with your money. No more to it.

If you get stopped out, what do you do with the money from the stock you just sold? What makes you so sure you will outperform your old stock, that you would have held onto, with your new investment?

A lot of times a stock gets "stopped out" because of an over all market down draft. If that is the case, I see no reason to use stops. If you just want to sit around with your cash, why not just invest in a money market account and sleep at night.

To me, you hold a stock because you like it. You sell it when you don't like it anymore.

[Karel]

If you don't use stops you're gambling with your money. No more to it.
The disproof of a universal statement is easy: just give one example where the statement doesn't hold, and you are done. I already did give such an example, so I am already done disproving your statement.

But perhaps it is a good idea to explain a bit more what I wanted to say. I didn't want to say: stops are bad; no more to it. I have shown pretty conclusively (as far as possible with a limited number of picks - 76), that a fixed percentage stop in conjunction with $$$Mr.Market$$$'s method lowers your returns, and when you add a specified risk tolerance and no diversification, it not only doesn't remove the gamble from the game, but it even lowers your odds. $$$Mr.Market$$$'s method needs diversification to get the gamble out of the game, not (fixed percentage) stops. But change any one of these parameters (different kind of stop, alterations to the method (or a completely different method), higher risk tolerance, and more diversification), and stops may start making sense. But only when you change the first two (different kind of stop, or the method itself), you might get a case where stops don't hurt your returns.

But please, if you love your money, make an analysis first, or paper trade your strategy if an analysis is impossible or impractical, before you put your money into it.

If you rely on blanket statements, you're gambling with your money. No more to it. ;)

[dmk112]

If you get stopped out, what do you do with the money from the stock you just sold? What makes you so sure you will outperform your old stock, that you would have held onto, with your new investment?

A lot of times a stock gets "stopped out" because of an over all market down draft. If that is the case, I see no reason to use stops. If you just want to sit around with your cash, why not just invest in a money market account and sleep at night.

To me, you hold a stock because you like it. You sell it when you don't like it anymore.

There are 100's of stocks everyday breakingout and going for new highs... not all stocks you pick are winners...thats what the stop is for. You get stopped out go on to the next stock.

[mrmarket]

There are 100's of stocks everyday breakingout and going for new highs... not all stocks you pick are winners...thats what the stop is for. You get stopped out go on to the next stock.


Just because a stock has traded down does not mean it will not recover. I have dozens of stock in my winning streak that were way down, and would have been stopped out, but actually then outperformed the market and eventually hit my sell target.

You're right..as of today, only 64 of my last 76 picks were winners.

[dmk112]

64 out of 75...not bad :P

[spikefader]

The disproof of a universal statement is easy: just give one example where the statement doesn't hold, and you are done. I already did give such an example, so I am already done disproving your statement.

But perhaps it is a good idea to explain a bit more what I wanted to say. I didn't want to say: stops are bad; no more to it. I have shown pretty conclusively (as far as possible with a limited number of picks - 76), that a fixed percentage stop in conjunction with $$$Mr.Market$$$'s method lowers your returns, and when you add a specified risk tolerance and no diversification, it not only doesn't remove the gamble from the game, but it even lowers your odds. $$$Mr.Market$$$'s method needs diversification to get the gamble out of the game, not (fixed percentage) stops. But change any one of these parameters (different kind of stop, alterations to the method (or a completely different method), higher risk tolerance, and more diversification), and stops may start making sense. But only when you change the first two (different kind of stop, or the method itself), you might get a case where stops don't hurt your returns.

But please, if you love your money, make an analysis first, or paper trade your strategy if an analysis is impossible or impractical, before you put your money into it.

If you rely on blanket statements, you're gambling with your money. No more to it. ;)
Nice post. Yep, I agree, that blanket statement, as with most blanket statements turn out to be inaccurate.

In the context of this thread, there are exceptions to the generally accepted 'day-trading' principal that 'stops save lives'. In the case of Mr.Market's diversified system, stops clearly DO NOT work (thanks Karel for the calculations).

So he is not gambling with his money, but rather putting the odds on his side. Hard to deny his 62 straight winners and the apparent robustness of his model. I wonder if it would survive the test of a long and yucky bear run.....

[phobophobia]

If Mr. Market makes more money when he doesn't use stops, then he shouldn't use them. If you don't use common sense, you're gambling with your money.

[New-born baby]

The longest and yuckiest bear run was the 1929 Crash.

Market Top--381 on 3 Sept 1929

Jessie Livermore shorts the market. [Spike, remember the Jessie Livermore from Maldives who visited your thread? Jessie Livermore was the rare man who "Spikefaded" the hot market in 1929. He made millions. However, he lost it all in the ensuing bear rallies, and committed suicide in 1932].

Gentle pull back until 24 Sept 1929. (304)

22 Sept 1929--Irving Fisher, Yale Economist, leading economic forecaster of his day, said, "The market is undervalued."

24 Sept 1929--Black Thursday. Market plunges before noon. At 1:30, Thomas Lamont of J.P. Morgan Bank saves the day with millions of dollars of stock purchases, but not before there were 11 broker suicides over the falling market. Dow rebounds and finishes the day at 299, down only 5 points.

28 Sept 1929--Black Monday. Dow falls 13% to close at 230. No saviors on this day.

29 Sept 1929--Black Tuesday. Dow falls another 12% to 194 on 4x the normal volume.

Sept 30, Nov 1-2, 1929--Bear Rally. But not for long. There will be 11 bear rallies before the market hits bottom in June, 1932.

Thanksgiving, 1929--By now the Dow has plunged to 145, down 62% from its 381 high on 3 Sept. Jessie Livermore is an incredibly rich man. His shorts have paid off handsomely.

Market Bottom--are you ready for this? The Dow slides to 34 (34!) in June, 1932. This proves to be the absolute bottom for the market. Down 91% from 3 Sept 1929.

Market Again Reaches 381--are you ready for this (take two)?--1954.

The market investing psychology was ruined for an entire generation.
I think we have seen some of that in our day. The bursting of the tech bubble has damaged the market.

[IIC]

I rarely use stops myself...you know why?...because it seems that I almost always get stopped out. I never kept track...but I'll bet I got stopped out over 70% of the time. So I figured...if I feel the need to set a stop...then why don't I just sell the darn thing right now?

There is another problem IMO with stops...lets say there's some bad news A/H...the thing gaps down and I get stopped out...I never kept track of this either...but many times you can get at least some of it back.

Just my thoughts...IIC

[IIC]

New Born...but think if you had realized that the bottom was in 1932? My Great Uncle did...He was one of the founders of this company in 1932 http://www.crowellweedon.com/ Click "About Us"...he is the one on the right.

He made tons...but I never liked him so I was not included...He died in the early 80's...Rich... but money isn't everything...at least not to me...IIC

[Karel]

The longest and yuckiest bear run was the 1929 Crash.

Market Top--381 on 3 Sept 1929

...

Market Bottom--are you ready for this? The Dow slides to 34 (34!) in June, 1932. This proves to be the absolute bottom for the market. Down 91% from 3 Sept 1929.

Market Again Reaches 381--are you ready for this (take two)?--1954.
Such a crash is an awful thing to contemplate. But stops won't help you: you'll get stopped out again and again. Only the (fore)knowledge "This is the most awful bear run we have ever seen" would help you. How $$$Mr.Market$$$ would react to such a crash? I can only guess. Let us suppose he rides the wave down. What now? Sometime after June 1932 he will probably close his streak, and start anew, with fresh positions. Probably this will be sometime in 1933, when the DJ more than doubles. His positions are much smaller than in 1929, but he is HUGE and hangs in. From the end of 1933 until 1954 the DJIA rises about 7%/year on average, and he is ready to profit from that.

How can you protect yourself against such a cataclysm? The first thing to ask yourself is: do I need to? If you are just investing with some play money and your retirement (or whatever) does not depend on it, you do not need protection. The more important your investing money is, the more important protection may become. Of course, you could always decide to run the risk, like $$$Mr.Market$$$ in the example above. If you don't, consider creaming off a bit of your gains. It will hurt the growth of your investment portfolio, but the cash cushion may be worth it to you. If, after a 15% return, you put 5% back in your investments and 10% in the cushion, you will have a cushion of one position after 10 closed trades, and after 62 closed trades your cushion is already about 40% of your investment portfolio (assuming a $$$Mr.Market$$$ like portfolio of 14 positions). You get the idea.

Regards,

Karel

[spikefader]

Stops won't help you: you'll get stopped out again and again. Only if you're a stubborn bull :D You could profit nicely if you ride a few shorts down....

How $$$Mr.Market$$$ would react to such a crash?
He would be a bagholder, no doubt in my mind.

....close his streak, and start anew, with fresh positions.
Assuming he doesn't do something crazy like double down on margin while it continues to fall and he goes bankrupt hehe

.....positions are much smaller than in 1929, but he is HUGE and hangs in. From the end of 1933 until 1954 the DJIA rises about 7%/year on average, and he is ready to profit from that. would he have the desire to after losing so much? It would surely take the wind out of a person, and maybe the cajones to rely on the system too.....yes, aweful thoughts these........

How can you protect yourself against such a cataclysm?
Hedge with put options and/or learn to short stocks.

[Karel]

I was, of course, assuming that we look at $$$Mr.Market$$$ picks only. When you add different strategies, things change. And shorting stocks isn't a panacea either.

I have also assumed that $$$Mr.Market$$$ is H U G E. And that he wouldn't have lost faith in his method: after all, the markets broke down and took his positions with them. No reasons for doubt here.

Your solutions are nice too. But hedging costs money and may be impractical for smaller investors. Shorting is another animal entirely.

Regards,

Karel

[New-born baby]

IIC, Karel, Spike, et al,

If you have noticed in my posts, I have not taken a position for or against stops. Spike asked the question, "I wonder how MM would survive in a long and yucky bear market," so I thought I'd throw one on the board.

In 1929, the market fell because it was built up on margins. The banks loaned people money to buy stocks with just 10% down. When in August, 1929, a recession began after basically a 10 year business boom (there was a very small downturn in 1927), the house of cards fell. The falling market triggered a series of margin calls that could not be stopped because almost the entire market was built on margin. And for the most part, the damage was permanent. Although the market recovered in 1954, the vast majority of stocks damaged by the fall never recovered their previous highs.

However, if you were not on margin in 1929, stops would have been a very good thing, wouldn't you agree? Money became very scare and precious after the crash, and losing 2% beats losing 91% every time.

On the other hand, I have been shaken out of positions in the past by stops that, looking back, I regret. The exceptions are when a thieving, dishonest CEO has been exposed while I was a shareholder.

My personal thinking is that it doesn't bother me if MM doesn't use them, or if Spike lives by them. And I certainly want to be friends with you all. What I am hoping to accomplish by all of our threads is to learn to be a better, safer, more profitable investor. And I think that will require brutal honesty with kindness. In other words, the facts unobscured by emotion, friendships, personal preferences, all stated in a kind way. No one here is an enemy. No disagreement is a personal attack. We are co-workers to discover the best investing methods. And that's why I would like to know if there is a way to tweak MM's system to make even more horsepower. What can we do, if anything, to adjust the system to make this thing fire perfectly so that every single pick is a winner in a shorter time frame than 1929 to 1954? Or is there a way to avoid a permanent loss, after paying $254 per share for Atchison, Topeka, and Santa Fe, and seeing her drop down to $2 per share, never to recover?

Best investing to you all always!

[IIC]

Yes...margin was a problem back then...but so were other things...like "painting the tape" The SEC was formed circa 1935 to regulate these things. Do they do a good job? Probably not...but now the crooks have to think a little harder...IIC

[spikefader]

New-born,

Nice post.

It would be great to tweak MM's system to perfection. That would be awesome.

Sadly, I am very certain that until the end of time or the markets, there will always be the rare problematic stock or not-so-rare poorly timed entry.

The question is how to eliminate ANY possibility of an apparent disaster like BEL (assuming it never recovers) or ANY poorly timed entry like MCRI the other day?? An impossible task. You'd need the ability to pick 100 % winners (impossible) or have perfect timing (impossible). So I think we can safely assume we CANNOT eliminate the possibility for those problem stocks or poor entries. So if we CAN'T eliminate them what do we do? We look to the things we CAN control. The answer to that is simple. We CAN control our emotions, our entries, our exits. Let the market do what it likes, but let us control ourselves and our actions.

In my humble opinion, there are only 2 ways to profitably trade MM stocks. Either you 1) fully diversify as MM does, or 2) patiently search for 'perfect entries' like I do, and employ those disliked tight stops that WILL prevent the position dying a horrible death, and keep losses so low that when a winning trade is finally handed to you it will make up for the many smaller stop outs.

Option 1 WILL take care of itself as long as the market doesn't crash, as Mr. Market has proven.
Option 2 WILL NOT take care of itself. To be profitable, it needs several things: a) satisfactory risk/reward b) a win % that compliments the risk/reward ratio. c) sensible money management d) proper position sizing e) low commissions d) unfailing discipline to execute stop loss and profit taking. THESE are the things that we can control, and the proper alignment of these WILL lead to profitability. No doubt in my mind on this.

All this is starting to hurt my head :D

Some concluding thoughts on how to time MM picks better:
What if there was a mandatory rule that one must wait until there is an X% downward move before a long is established. Or maybe a rule that says you can only go long at a valid 50% retrace zone.
Results would be a lot different, I'm sure. Would those under performing stocks have delivered their 15% by now? Anyone want to backtest this?

[Karel]

Hello Spike,

I don't know about "horribly tight stops", but they are amazing (to me). As for your other thoughts (entry x% down etc.), there are a whole lot of top 5 posts that you could look at, to see how that would work out. Just to keep you busy! And you might get ideas about how you run your $$$Mr.Market$$$-plus portfolio.

Regards,

Karel

[spikefader]

hehe the $$$Mr.Market$$$-plus system. I like it.

Actually, I went back over all his open positions and had he waited for a 50% retrace entry measured on the large move up on each chart, his entries would have been quite a bit lower obviously, and many would have already made their 15% and he'd be out. Only a couple would still be open, most of them would be break even or on their way to the target. And only one would not have been better off - and that's BEL obviously. Entry would be long around 13.00, but that's a whole lot less of a loss on the books. I'm going to do the same check with his positions that have hit their target to get a picture. It's an interesting piece of backtesting.

[spikefader]

Well, just at first glance, the results are outstanding and worthy of trading.
If one had waited until MM's pick had made a 50% retrace of a bullish move starting from the nearest intermediate low on the chart somewhere, entries would have been profitable.

HDWR: long at 28.07 target hit already
WSB long at 11.92 and 96% of the way to target
DECK 22.46 and target hit
CHKE 23.40 and target hit

This really is an interesting concept.

HELP WANTED:
For future trades, I'm requesting help from you guys -- to help monitoring MM's new picks. If I fail to spot one or forget to watch for a while, whoever spots a 50% move from an intermediate low somewhere on the chart to HOLLER IT OUT! :D

And conservative traders looking for an edge to Mr.Market's system, just wait for that condition to be met and your entry is going to be based on both FA, and an important TA support area - probably one of the best out there - the 50% retrace.

My head hurts again :D

EDIT: corrected a number there and attached an example chart.

[spikefader]

another example of what to look for....

[scifos]

Sadly, I am very certain that until the end of time or the markets, there will always be the rare problematic stock or not-so-rare poorly timed entry.

The question is how to eliminate ANY possibility of an apparent disaster like BEL (assuming it never recovers) or ANY poorly timed entry like MCRI the other day?? An impossible task. You'd need the ability to pick 100 % winners (impossible) or have perfect timing (impossible). So I think we can safely assume we CANNOT eliminate the possibility for those problem stocks or poor entries.

Indeed, if one could perfectly assess a stock's potential, then you would know its future value (price?) and then the stock price would instantly move to its absolutely correct fair value, at which point nobody would buy or sell (speculate on future price). This is 'the game' of the stock market, to better assess a stock's future value (or price, because sometimes price moves irrespectably to value [this is why MM holds losers, because they have postive future value(ie the pack will realize its mistake), but at the moment the price is moving the wrong way]).

What I find really interesting is that when assessing a stock's potential future price, you must factor in other investor's assessments, as the aggregate opinion("the pack") of a stock's value moves the price. So you just need to be ahead of the pack in recognising a current price/fair value discrepency. I know this is somewhat contrary to the momentum investing that goes on here, which is a follow the pack, strategy, but I think beating the pack to the pot o' gold means more gold for you. Trick is, its easier to identify where the money is going and decide if you want to follow it (MM uses earnings) while beating the pack requires guessing where the pack will go, a much harder and riskier thing.

Where stops come in, I think pure momentum plays can have big dangerous downside (limited by MM strict earnings requirements, which makes it more complex than pure momo investing). Momentum, espically the strong momentum stocks that can show up on MM screens, tend to get overextended. Once the pack realizes it overshot the fair value (sometimes by a bunch [ex:TASR]) then the price falls even more rapidly than it climbed. Here's the momentum strategy problem that is just as hard as the valuation strategy's problem of anticipating pack movement. When has the pack gone too far and where to stop following (MM says 15% from where he entered, but he doesn't seem to analize where in the pack 'stampede' he entered). Stops can provide the protection a momo investor needs. A healthy trailing stop will allow you to exit a momo stock that is in its rapid decent mode.

[New-born baby]

Spike,

I am answering your help wanted ad. I want to help you watch the numbers so that I can jump in these picks. I think this new 'system' is going to work very nice!

[spikefader]

Great! I think so too.

I'm going to give some thought to stops too.

Perhaps one would be wise tucked under the 100% retrace zone too. Let's face it, if that support area fails then it'll likely one of those rare duds and needs to be cut. It should work out to be about a 15% stop. I'll go back and see how that would 'fit' for trades he's already made, and trades that are open. From memory, none went down that low (except BEL of course). That way, you are guaranteed that even if you're not properly diversified, your max risk is only 15% of your position and you are protected against catastrophy. This is only initial thinking....... other thoughts welcome.

[fleetwood]

I'm one year new to stock investing, and stops have consistiently knocked me out of numerous positions that would have done wonderful after I was out of the race. I 've had two stocks that have taken hugh hits without stops, but feel they are good companies and I will wait them out, liike Mr. Market. In the overall scheme of things for me, the winners still beat the losers 4 to 1 after a shake-up.

[billyjoe]

Mr. Market would have been stopped out of 28 of his 63 winners with a 8% stop. This includes 12 of 17 picks between August 2003 and January 12, 2004. More details will be posted shortly on a different thread.
billyjoe

[spikefader]

Mr. Market would have been stopped out of 28 of his 63 winners with a 8% stop. This includes 12 of 17 picks between August 2003 and January 12, 2004. More details will be posted shortly on a different thread.
billyjoe Interesting!
Quick crude math assuming you diversified with 12 positions, of say 1k each position for each of calculation:
For winners only:
28 stop outs = -2240
35 winners = 5240
= 3000 profit.
Now for the losers....... how many current open positions would have stopped out??
All this not including slippage and fees of course.

[billyjoe]

Spike, All 13 of the current open positions have hit the 8% stop since purchase. This makes a total of 41 of Mr.Mkt's 76 picks since January 2002!
billyjoe

[Deaddog]

See the Stops are for wimps (http://www.mrmarketishuge.com/showthread.php?t=562) thread

Regards,

Karel

Karel:

I read through the thread.
I can see where the method can operate without stops.

The thread ended in 2004. Have you run the numbers recently? How did things go during the meltdown in 2008? I noticed that the records on the Home Page start in 2009.

I also noticed that there is a wide variation in Annualized Gain. Has any research been done into dropping a stock if it does not perform in a timely manner? Kind of a time stop. If the stock hasn’t hit the target in 12 weeks, sell and put the money to work in a better performer rather than wait for the stock to hit the target which may take several more weeks if not months.

Time is money. A 30% annualized gain will beat the market. A 200% gain kicks ths sh*t out of it.

[Karel]

Karel:

I read through the thread.
I can see where the method can operate without stops.

The thread ended in 2004. Have you run the numbers recently? How did things go during the meltdown in 2008? I noticed that the records on the Home Page start in 2009.

I also noticed that there is a wide variation in Annualized Gain. Has any research been done into dropping a stock if it does not perform in a timely manner? Kind of a time stop. If the stock hasn’t hit the target in 12 weeks, sell and put the money to work in a better performer rather than wait for the stock to hit the target which may take several more weeks if not months.

Time is money. A 30% annualized gain will beat the market. A 200% gain kicks ths sh*t out of it.
Deaddog, I copied your post to this thread to answer it here.

It is better than "can operate without stops". Stops would kill $$$Mr. Market$$$'s method. One of my points is that a method consists of BOTH an entry and an exit strategy. The very limited target of my research was to establish wether stops would improve the exit strategy of $$$Mr. Market$$$. They don't and they even harm the results. Other tweaks could be researched (and have been researched: see the retracement entry strategy). Feel free!

I should note that I use a time limited hold strategy myself and have dropped the 15% sell rule. Only when I am literally "following $$$Mr. Market$$$" and buy one of his picks do I follow his exit strategy.

As regards general slumps in the market, $$$MR. MARKET$$$ is OK when they happen. He doesn't sell and the overall good valuations guarantee a speedy recovery. This is not exact, but based on what I see in my own portfolio. The drops may be deeper than those of the market, due to the momentum character most picks share, but this is more than compensated by the recovery.

Of course much better strategies may exist. Do not hesitate to share them when you find them. Your HUGEness will be recognized.

Regards,

Karel

[smaskell]

I also noticed that there is a wide variation in Annualized Gain. Has any research been done into dropping a stock if it does not perform in a timely manner? Kind of a time stop. If the stock hasn’t hit the target in 12 weeks, sell and put the money to work in a better performer rather than wait for the stock to hit the target which may take several more weeks if not months.


The problem testing this hypothesis is we don't have anything to compare it against. We would need to know into which stock you would transfer. MrM doesn't give an alternate pick with his winners. You would have to test against a known alternative. Perhaps rolling out of the unenergetic pick and spreading the recovered money between the remaining current holdings. That could be detrimental depending on your commission rates.
Also you could potentially just exit and double down on the next pick.
A number of options could be tested, the potential "better performer" would just have to be somehow identified ahead of time. I might look at doing a couple of these tests if I get some spare time after I deal with the tax man...

Scott