Stops are for wimps

[New-born baby]

Long and Yucky Bear Run

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 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]

Stop are for . . . .

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

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!

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

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]

My job application

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!