Hello folks,
I am pretty much a newbie in this game, and have recently used a StockRank based approach (SR > 90 and a few other criteria) for my ISA and SIPP with 15 stocks in each. I expect to hold stocks for around 1 year on average.
In the last week or so two of the stocks fell of a cliff due to (what seem fairly minor) profit warnings:
1. Alumasc (ALU), StockRank 99 which lost 23+%
2. Amino Technologies (AMO), StockRank 94 which has lost approx 30% today
Now, of course, events like these are bound to happen from time to time and I guess it's just an unfortunate roll of the dice (for me).
I didn't have any stops in place, but I'm thinking now that maybe I should start using them.
One school of thought would be the fundamentals seem ok still so they should recover _eventually_ so stops shouldn't be necessary. But if the drop is large and the recovery time is long there comes a point where it would be more profitable just to cut losses and put the money elsewhere.
If I do start using stops they would be fairly loose, I'm thinking around 15% so they don't get unnecessarily stopped out. (The exact value would depend on the stock).
So my question is "To stop or not to stop?" - do you use stops in your own portfolios? Are they worth it or more trouble than they're worth?
Hi Ivolpe
Welcome to the Stockopedia community. Stops are a contentious subject, as some investors use them and others don't. LT value investors who've done their research, and believe in the company, often use drops in share price as a buying opportunity. Whereas, some investors argue that we will never have perfect information about a company, and that by putting in place a stop you are preserving the value of your initial capital.
Unfortunately based on my limited investing experience, I would say there is no right or wrong answer as the situation depends on individual stocks. As a general principle, I would be much more inclined to use a stop loss on a more speculative share as opposed to a long term buy and hold stock with a solid balance sheet and strong cash conversion.
When setting a stop you really need to look at the chart for a specific stock, and identify areas of support and adjust your stop to ensure you don't get stopped out on intraday volatility. For example if the support level for a specific stock is 120p, you would set the stop below this level, but you need to allow for some volatility to avoid being stopped out at say 119p intraday and for the price to close at 120p or 121p.
In terms of the two stocks you mentioned, a stop would have worked on Alumasc (LON:ALU), as the price dropped after an uncertain trading update. However, a stop would have been of little benefit for Amino Technologies (LON:AMO), as the share price was marked down at the open this morning after the profit warning.
Best wishes,
Imran.
