When do you cut losses?

21st Mar '16 by Paul Flanagan

23 comments 10979 reads

I started using Stockpedia at the start of March and so far my portfolio is up 2.72%.

My best performing stock is Lighthouse which is up 33.84%.

My worst performing stock is NWF which is down 7.96%.

I'm wondering what strategy you use to cut losses?

Do you stick to a certain % drop before you sell? Do you use a stop loss?

Or do you just hold the position until your rebalancing date?

In terms of NWF, I'm not exactly sure what I should be looking for in terms of ratios. I noticed they just acquired a smaller competitor on the 1st March. I also noticed their Financial director sold 10,000 share but repurchased them again using his SIPP. I'm assuming these two points are positive news.

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About the Author

Paul Flanagan

Premium Member

23 comments

rhomboid1

22nd Mar '16

Im not sure this will help much but fwiw I'm now reviewing every stock that falls more than 10% and then checking I'm still comfortable with my case for buying it, I may then top up , reduce or sell out depending how I feel about the individual merits of the stock in question vs. stocks on top of my watch list.

As a result in the same sector I sold out of Carr's (LON:CARR) and bought Renishaw (LON:RSW) instead, I sold out of Wynnstay (LON:WYN) and looked closely at NWF (LON:NWF) but opted to top up Capital Drilling (LON:CAPD) instead, different risk profile, different sector but looked a better home for the money for now.

NWF is a great low risk hold IMHO at current levels and I'd be holding it if I had a shorter time horizon than the one I'm working to.

Best advice is don't fixate on the short term just make sure you don't miss the big picture for each stock you hold .

Good luck

whitmad

22nd Mar '16

"Cutting losses" is the wrong way to look at it. Look at the price and prospects of the company as it stands now, ignoring what you originally paid for it. If you consider it a good investment at the current price, then keep it. If not, sell it. The same applies if the price has gone up, down, or sideways.

Petrox

22nd Mar '16

I don't like keeping heavy losers I have a trailing stop/loss of 17% and look closely at the case for keeping the share if it goes down to that level. However. if the whole market is down so it's not just the one share that is performing badly it might not be a reason to sell.

Disco Ball

22nd Mar '16

I have a strict max 10% stop-loss rule but I mostly take smaller losses. I always buy from break-outs of resistance or support levels and the stop-loss area is usually pretty obvious and tight. Holding onto losers is a waste of cash capital and psychological capital. Holding after a profit warning when the shares have tanked just because you said to yourself you would only re-balance annually seems crazy to me, as is holding and hoping.

vik2001

22nd Mar '16

I got rid of nwf from my naps portfolio after that first sharp fall this year

Whitbyview

25th Apr '16

Do stop losses work? I'm sure they do but my own personal experience recently hasn't been too good. In four or five cases this year I set them and they were triggered and the end result was I sold at the very bottom of the market and these shares have now all recovered and then some. I think my personal lesson here is think hard before buying and if the case hasn't changed despite the fall, hang in there or perhaps better still, buy some more. This only works for solid companies you trust will not go bust of course! As for NWF, I don't hold any but am now seriously thinking about buying.

Rusty2

26th Apr '16

Not keen on NWF (LON:NWF) myself, the margins are so thin. Debt is also up.

vik2001

26th Apr '16

this has been falling for sometime now, and yet its the best rated stock rank at 95 in the energy sector on here. although the momentum value is going down shouldn't the overall stock rank value fall down to ?

Rusty2

26th Apr '16

Never fancied it, is it really energy though?

I don't agree always with Stockopedia ratings, one reason why I have not done a NAPS portfolio. Costain (LON:COST) is another high rated but to me unattractive share, thin margin, large contracts, I see that has fallen also. Not sure NAPS works in this sort of market.

vik2001

26th Apr '16

i sold out on NWF a while back when I did the NAPs after it started dropping. glad I got out, but be interesting to see if its momentum creeps back up now after the sharp fall

Whitbyview

26th Apr '16

I don't really regard it as energy either as I've said in the past. If people buy this as an alternative to Shell they really are comparing apples and oranges in my opinion. I think of it more as an agricultural consumer defensive personally. My feeling is that it is being hit in the same way that house builders are right now. One of the biggest losers from Brexit would be agriculture and the associated communities.

andrewdb

26th Apr '16

The SR values are partly based on momentum, so if the value drops over months, so does the SR.

I look at 3,6,12 months performance compared with the FTAS and if all 3 are 'red' set an automated stop loss

There is not a lot of science in this other than that momentum effects are real and I do not have the self discipline to bail in the 'heat of the moment'.

imranawan

26th Apr '16

Out of interest where do you set your automated stop loss? Below the recent support level for an individual share. Just trying to get a sense of your thoughts with regards to this.

Noodle Hat

26th Apr '16

have a look at this thread:

http://www.stockopedia.com/content/am-i-an-assassin-or-a-rabbit-a-raider-or-a-connoisseur-125449/

regarding responses to sp falls and implicaitons it has on your folio. personally im more toward an assassin and would find it hard t hold anything that had dropped more than 15-20%. Remember a 10% loss only needs a 11% gain i think, but its exponentially bad from there down! Obviously depends on normal volatility and possible support levels. If you decided to sell, rather than stop loss stopping you out after a gap down, then its unlikley your sell at the lowest point and you can always buy back in.

By selling you detatch yourself from the story/ stock and is much easier to look at it objectively.

Ive done this with Bonmarche Holdings (LON:BON) and glad i sold at 11% loss. I reinvested in Goodwin (LON:GDWN) just before it jumped. I did however average down in Plexus Holdings (LON:POS) rather than sell...so each situation...

WarrantStar

26th Apr '16

My advice is to look at the fundamentals. What has changed for the business, if anything? Read the last two statements issued by the company. Try to think about the future prospects for the company. If the prospects for the business have seriously deteriorated then sell. If the prospects still look good then you should probably hold on. It may just be that a that a big share holder has decided to sell for their own personal reasons. If it is a big holding for you then you could consider selling half your holding.
It will always be a difficult situation. I have been there numerous times, and have mostly found that it has been best to hold on if the fundamentals of the business are still good.

andrewdb

26th Apr '16

Again no science here and I encourage you to use what I do as a place to start for your own thoughts - and better yet if you disagree as I have no private island that evidences this is a good approach.

For me, finding any non-completely teapot method of judging exit points is all about discipline - I do tend to hang on for much much much too long. My problems are probably not yours.

Of all my holdings, the only one on watch atm is Sky (LON:SKY). It has underperformed the FTAS in 3/6/12m basis according to my spreadsheet.
Looking at the chart there are what could be thought of as a support line at about 950.
Take 3% off that - 921.5.

I would have preferred to use a stop-loss relative to the FTAS but HL doesn't do that and I am not sure if anyone does.

Note that this is a big, well analysed company that is unlikely to spring a big surprise on results.

I (again only personally) wouldn't put an automated stop on a smallcap as guidance tends to be more sporadic and market overreaction more common.

PhilHofGrowYourDough

26th Apr '16

Hi Paul,

I fully appreciate that my answer might be totally frustrating but I think if you can rise to it you will become a better investor, so here goes ...

There is no point asking how others cut their losses unless ...

1) You understand your buy criteria

2) You understand their buy criteria

For example ...

1) If I'm a value investor, I'd only cut my losses if my fundamental analysis of the company came unstuck

2) If I'm a Quality & Momentum investor (which I am) I might sell on loss of momentum, in effect a trailing stop loss (using Ichimoku charts to guide me). That said I don't sell if there is a general market spike down that affects all of my shares.

So you see a sell strategy has no value if you don't understand the underlying investment approach.

I hope that helps a nd best of luck
Phil

Bigclaw

26th Apr '16

Hi Paul,

Everyone has their own ideas on this, having learnt the hard way I would say that you have to be clear in your strategy, and it has to be YOUR strategy, not Warren Buffet's or Robbie Burns' or anyone else's. This will often only come about after a bit of time investing and after you've made a few mistakes so don't be too hard on yourself.

I would suggest that Stockepedia is nothing more than another method of bringing various companies to your attention so that you can study them further and decide if they are right for you to buy or sell. It is an excellent source of information and the NAPS have done very well, but you have to know what you're investing in and why as opposed to just buying a load of '99's'. If you don't know why you bought you won't know when you should sell..
My own take on stop losses- They take emotion out of the equation and I wish I had used them more o a couple of occasions where shares tanked on me. You can always buy back in if the shares start to rise and it's a way of protecting your capital. However in volatile markets think carefully about where you set them, I would suggest charts do have a use for that in giving you an idea of the bottom..

Lastly, the best advice I got- you will know when the size of your portfolio is equivalent to your ability as an investor as its when you can sleep at night without thinking about the market and bad news stories don't get you too concerned. Again I found that out the hard way. With that in mind- if you don't have stop losses in place I would think ahead so if the market does have a big correction / crash you have a strategy in place. The recurring theme is to have a well thought out strategy :)

Good luck!

Bigclaw

vik2001

9th May '16

now could be a good time to buy back into NWF, price has come down quite a bit and could possibly see a up trend.

the company suffered due to falling milk prices across the UK. As farming budgets get squeezed, farmers are spending less on agricultural feed. The revenue hit the wider group largely came from the agricultural feed division in the first half.

The fall looks slightly overdone. NWF is never going to deliver huge returns, but that steady dividend income looks attractive in today’s markets. there could be a lot of selling in may, but at same time a lot of buying also for those embracing volatility.

I would keep a eye on this to buy back in, just as oil dropped, milk barrels will eventually start rising back up :) Its also helps that NWF is well diversified in its area it operates.

TangoDoc

11th May '16

I looked at NWF and a couple of things occurred to me. One was that only after the fall in price does this company fall within my "possible buy" list, as the dividend yield is above my essential 3.6 percent, but only just. For a share I had bought before with higher yield, this would be the point at which I'd be wondering if I should now sell.

Could it be that the original attraction was that, once upon a time, somebody thought this company was worth £2 and, surely, sooner or later, someone somewhere would think the same again? If so, could that be the least successful, fallacious buying strategy of all? We all develop our own comfort blankets for parting with money. I cannot bring myself to own a piece of a company that offers no dividend, merely on the chance that it will rise in price. For me, that is as impossible as betting on greyhounds. It makes no sense to me either if the dividend is less than the rate of inflation. The added benefit of my comfort blanket is that, when the SP falls, as long as that is not because the company has warned of a loss in forward dividend, I see a buying opportunity for even higher dividend yield, not less.
Taken to its limits, as long as the total re-investable yield is acceptable, there is little need to sell anything and certainly no pressure or stress. Ultimately, the capital value of my portfolio should only concern my beneficiaries who will pay the inheritance tax with gritted teeth!

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Paul Flanagan

23 comments

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