Apprenticed Investor: Stop-Loss Breakdown

Tscm_1The latest "Apprenticed Investor" column is up:   Apprenticed Investor: Stop-Loss Breakdown

This week’s column is probably the most important one I’ve ever written. I hope you read it.

Our discussion of stop losses is to help you learn one thing:  How can you avoid anyone position from causing giant losses; The key takeaway is a short lesson in developing that methodology.

Here’s an excerpt:

There’s an old joke about the investor who never used any stop losses. His friend knew his big positions were getting crushed.

Out of concern, the friend asked, "How are you sleeping?"

"Like a baby" he answered.

"Really? You aren’t nervous or upset?"

"I sleep like a baby" he repeated.

"That’s amazing. I’d never be able to sleep through the night with those types of losses."

"Who said anything about sleeping through the night? I said I slept like a baby: I wake up every two hours, wet myself and cry for 30 minutes before falling back to sleep."

That’s why risk management is so critical: to save you from sleeping like a baby, and in the long run to save you a lot of money.

I believe that having a stop loss strategy is the single most important tool that is overlooked or ignored by individuals who manage their own money.


Apprenticed Investor: Stop-Loss Breakdown, 11/4/2005 3:04 PM EST

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What's been said:

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  1. hans Suter commented on Nov 6

    from the entire piece:
    “There’s a reason flight attendants show you where the emergency exits are before takeoff”.
    On my last flight with AirBerlin (to Berlin, where else) I heard: ” pull down the mask, put it over nose and mouth and think positive.”
    Somehow it fits to your column, too.

  2. Damian commented on Nov 6

    Nate – the point of rules like those that Barry has outlined isn’t that they always work perfectly. No investment rule does. His point is just that money management is the most important tool – don’t lose money. Stops helps you do that on average (I believe). I think what is most important in all of this is that you have a plan – too many people I know buy a stock and then, when I ask them when they are out, they have no answer. Not a great place to be.

  3. royce commented on Nov 6

    There’s a certain amount of volatility with some stocks. Swings of 15-20% aren’t uncommon of a year or two even in very good, well-run companies. If you trade in an out of them hoping to avoid big down movements, seems like you risk racking up transaction costs that act as a drag on total return. Does that not happen?

  4. Brandon commented on Nov 7

    Thanks Barry, I’ve been looking forward to this article for several weeks ever since you first hinted at it in the Apprenticed Investor colum. I have a very simple stop-loss method I use but know it could use a lot of refinement.

Read this next.

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