Stop-loss orders are widely embraced by investors, including many RealMoney subscribers. However, that alone doesn't mean they have much merit.
This type of order, which generates an automatic sale of stock when it drops to a predetermined level, is often a tool for technical analysts, who trade only on a stock's chart patterns, not on company fundamentals. But if you're eyeing the bottom line and want to buy a good company at a decent price, stop-losses don't accomplish their intended purpose: They do not stop losses.
Stop-loss orders aren't used for other assets, so why stocks? Is a stop-loss useful when you're trying to sell your home, for example? Of course not. If bids are dropping, no rational real estate owner draws a line in the sand at a 10% decline and automatically sells when the bid falls to that level.
Sellers of privately owned businesses don't use stop-losses, either. Can you imagine a private business owner automatically selling his or her company because an offer arrives that is 10% lower than last week's offer? If that sounds irrational, then why would it make any more sense for an investor in a publicly traded business to use a stop-loss order?
Here's the key: Owners of real estate and private businesses generally have a good idea of what their assets are worth. So a stop-loss is of no utility to them. If you really know what an asset is worth, there's no reason to sell because the current bid is low or going lower. On the contrary, a lower bid is a reason not to sell and instead hold fast to your asset.
On this issue, fundamental investors face a classic either/or dilemma: Either they're sufficiently skilled to know what they're buying and don't need a stop-loss, or they're insufficiently skilled to know what they're buying. In the latter case, maybe it's not in their long-term best interests to make their own capital-allocation decisions.
Consider these other potential pitfalls:
Using stop-losses results in decision-making asymmetry. You should seek symmetry in your buying and selling decision-making process. You can't buy because you like the long-term fundamentals, such as management, price, value and competitive position, and then sell because of nonfundamental factors, like a 10% price decline. Buying and selling decisions should be based on the same underlying thought process; in my case, all decisions are fundamentally based. The fact that a stock goes down or up by 10% after I buy it is irrelevant because I'm confident in my estimate of its long-term value.
Stop-losses are a form of insurance. Maybe you use a stop-loss as insurance in case you missed something in your fundamental analysis. It can add up to a fairly pricey policy, if you factor in trading costs and slippage. The better -- and cheaper -- form of insurance is simply to raise your buying criteria. If you spend more time getting the fundamentals right in the first place, then the extra insurance cost of a stop-loss is unnecessary.
Don't chase tails. You shouldn't allocate capital to a stock unless you think it's a compelling value. If you thought a stock was a compelling value when you bought it, then why sell it after it declines 10%? If you use stop-losses this way, you're simply chasing the tails of other investors. Assume that you'll never buy at the low and that a stock will decline over the short term after you buy it.
Stop-losses are arbitrary. There's nothing magical about a stop-loss point. Are you willing to accept a 10% price decline? Why not 12% or 15%? Whether you draw a line at 10% or 30%, it's still an arbitrary one.
Consider a Double-Up Strategy
The next time one of your holdings gets clocked, despite the fact that you've done your homework and nailed the fundamental story, consider the opposite of a stop-loss strategy. Think about doubling up on the position, something I've done successfully in The Turnaround Report portfolio.
Your second buy lowers the average cost basis for the total position. If you're right on the position -- that it's undervalued -- you'll end up making volatility your friend. And to the extent that you buy more shares at a price demonstrably lower than the company's underlying business value, your margin of safety is wider.
Enviado: 25/11/2003 11:11
Embora tambem já tenha ganho algumas vezes... 
, têm alguma bola de cristal.....