In Chuck Jaffe's ongoing column "Stupid Investment of the Week," (MarketWatch link) he opines that it is stupid for investors to forego stop-loss orders. Excuse me for pointing out the obvious, but after a 50% Dow decline is that the time to be saying this kind of thing?
Readers know I cut my losses all the time, often ruthlessly and with little emotion, even if I am convinced my trade will turn a profit in the end. Keep in mind that this blog is about short term trades, mostly selling short put options, so one big loser can snowball into epic size.
The other side to think about is value investing, buying a stock or sector, or the entire market for the long term because it is cheap based on valuation models. For value investors, bottom fishers and the like, stop losses are a poor way to proceed. Better to take a small position first, then be ready to double up, if it moves against you. For value investors, diversification and right sizing positions are more of a bulwark against losses than cutting the losers.
It is interesting to note that Warren Buffett has always been one to take big positions, from his early days to when he made huge fortunes. The caveat is that few of us are like Buffett. Most would-be Buffett's get wiped out because they turn out to be wrong, and one of their huge bets turn against them and wipes them out.
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