Stop loss orders

On the PCGS forum there is some discussion on stop loss orders, and the like in this thread (link).

On this down day in the stock market it is a timely topic. Limiting losses is vital for traders, not so much for long term investors. I've touched on the subject of stop loss orders before in this February 23, 2009 entry (link2). It is uncanny that a good many investors buying in on 2/23/09 using stop losses would have been stopped out near the bottom and likely have missed most of the 40% rally off the lows.

Again, for long term value investors, stop losses are a poor strategy. The reason for buying is because of mispricing, a perceived bargain. A bargain that gets cheaper is even a better buy, time to load more. The reason to sell, isn't a lower price, it is a change in the fundamental story, or an acknowledgment that initial analysis of a bargain was wrong.

For long term value investors, diversification, asset allocation, gradualism are better long term strategies for success than tight stops. For traders, stops are essential, as is right sizing of positions and risk management.

As for traders, while no one goes into a trade to lose, it is predictable that certain types of traders will tend to lose. One group of predictable losers are novices that trade without a plan to cut their losses, novices that trade too big a size for their bankroll, that let emotion in to cloud their thinking. These folks are extremely likely to suffer big losses and lose their entire account. It is predictable.

Long SPY (expiring this Friday)