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Stop Loss

STOP LOSS SENSE

The stop loss system is an essential aid to successful investment. No serious investor should work without it. You have never made a penny in the market until you have sold, taken your profit, and popped it into the bank, your wallet, or wherever you keep your cash.

Paper profits are for the birds. They may look good, sound good, and fly away before you can catch them. The only profits which count are the ones you take. And the stop loss is far and away the best guide on how to take them.

HOW IT WORKS

The system has the virtue of being simple. When you buy a share, set a price at which you will sell if it should fall back. You can vary the margin, but as a rough rule, you should set your selling price - your stop loss - at about 20% below your buying price.

If you buy for 100p, set your stop loss at 80p. If it falls to 80p, sell it automatically. That way, you have limited your loss to 20%. That might hurt, but unless you can stand that sort of setback, you should not be buying shares.

Never, ever, reduce your stop loss. This is the cardinal rule. Obey it without flinching. Do not attempt to reason your way out of it. One of the crucial points about the stop loss is that it removes wriggle room. It imposes an objective discipline of a sort.

PRESERVING PROFITS

The system, though, is not just about stopping losses. It helps preserve profits. If your share rises, raise your stop loss behind the price, penny for penny. Trail it up. So if your shares hits 110p, your stop loss should advance from 80p to 90p. At 120p, the stop loss should be 100p. At 150p, it should be 130p. At 200p, it should be 180p.

That way, once you have scored a 20% gain, you should not lose. You should have protected yourself against allowing your profits to drift away - easy to do. The stop loss does your thinking for you. It tells you when to sell.

REDUCING RISK

Even better, it is a significant way of reducing risk without reducing potential rewards. You can buy a share which might soar to the skies, and can ride it all of the way up. But if it falls, you should not lose more than 20%.

Not bad, that - a 20% downside risk, and an infinite upside. Use it sensibly, and it gives you comfort when it comes to playing those high reward situations which all too often carry higher risk. With a stop loss, you reduce the risk.

THE SNAGS

It would be foolish to pretend the system is perfect. It is not. There will be times when very bad news is announced unexpectedly, and the price plunges through your stop loss and goes lower. It happens. When markets are good, it does not happen too often. When markets are bad, there is more danger - but then you will probably have sold out of a bad market anyway.

As a rough rule, if a share does fall through your stop loss, it is as well to sell for whatever you can get. Profit warnings, for example, have a habit of coming in threes.

There are times, too, when shares fall through a stop loss, and bounce. You are left cursing your sale, frustrated at the profits you have missed. Too bad. Look upon those lost profits as an insurance premium. How much worse it would have been to sustain further losses from a continuing fall than to have lost - what? - just the dream of greater profits. The loss will be real, the lost profits will make no difference to your wealth.

SETTING THE STOP LOSS

There is no clear formula for this. Indeed, there is no set formula for anything in the stop loss, other than the rule that you should not reduce your stop loss. Some volatile shares, or low-value shares, will require a margin of more than 20% when setting a stop loss. Others, active, freely traded stocks, can take a tighter margin, maybe as close as 10%.

It is up to you. Try to judge the volatility of your share, and set the margin accordingly. Or simply assess how much risk you wish to take.

TAKING PROFITS

There is another useful aspect of the stop loss. If you are wondering whether to sell, whether to take a good profit, set a stop loss tight behind the price. If, for example, you think you might want to sell a share which is trading at, say, 148p to 152p and are worried about possible bad news, then set a tight stop loss at 146p. You should then move it up, penny for penny, behind any price rise. That way, you capture a few pence more if the good run continues. If it does not, you sell on a fall to 146p, and you have sacrificed little.

COSTS

The examples I offer are not quite real, of course. They ignore the buy/sell spread, and the dealing costs. For the sake of simplicity, I use mid-prices. Make some allowance for these factors. You will incur the costs and face the price spread whatever happens. Too bad. They do mean a 20% stop loss involves a loss of perhaps 25%, maybe more.

There is nothing sensible you can do about that. If it worries you, set a tighter stop loss, at say 16%. But while those who hate the stop loss raise such trifles as a criticism, they matter little in the real world. We all have to live with them, whatever.

DOES IT WORK?

The system does work. It works imperfectly, but, by golly, it does impose a wonderful discipline. You stop telling yourself to hold on, that things will get better. It forces you out of a falling market.

We all do it, persuading ourselves that any setback is temporary. Sometimes that is so. But better be safe than sorry.

The system is not new. I came across it in the late sixties when I wrote a small tip sheet with the controversial market commentator Bob Beckman as a contributor. A wonderful character, Bob knew more about the markets than anyone I had then met. I have never agreed with all of his opinions, but he was right about the stop loss.

I used it successfully everywhere I wrote thereafter. In the eighties, with my Daily Mail Saturday share tipping column, I was pretty much a lone voice pushing the stop loss. It served me well, and those readers who heeded it. I gave up that column about a year before the '87 Crash, worried about the market.

I started again in the autumn of 1992, thinking that being bounced out of the Exchange Rate Mechanism was good news for shares. That was right. I ran the stop loss until my contract was not renewed in May 2001.

Once again, it served me and my readers well. I know some subscribers have followed me here as a result of those columns. It was not particularly clever of me to tell people - time and again - to sell in the spring of 2000 as the tech boom turned sour. What made me right was my stop loss system. I repeatedly told readers to use it, not to ignore it, and to take the enormous profits many of my tips had generated then.

While I did not follow it myself in every share I had tipped and then bought (usually I could not sell because I was writing, or intending to write about the shares), I did take some fat profits after telling readers to sell. That is why I have been able to buy a condo in Florida. Successful stock market investing can help change your life - if you use a stop loss.

Preparing this piece, I have gone back to some of those columns I wrote in the Mail in the spring of 2000. One of February 5, 2000 bore the heading "Be Prepared For A Fall". On March 25, the heading was "Stop Loss A Better Way To Work Than Knee Jerk". On April 15, the heading was "Time To Wait For Sun To Shine on Market".

I did not write those headings. Journalists rarely write their own headings. Others read and edit the copy and write them. But they reflect the comments in the accompanying pieces.

It would take too long to compare the prices of every share in those pieces. Some of the companies have collapsed. But looking at the stop loss list I published on February 25, there is not one share out of the 25 which is higher now than the price I suggested selling at. The actual prices at that date were all some way above my stop loss levels, so potential; gains for sellers were much greater.

Indulge me while I cite a few examples. I suggested a stop loss for Phytopharm at 380p. On February 17, 2003, the price was 77.5p. The sell price for Applied Optical was 375p, against 17p. Robotic Technology stop loss at 685p (54.5p).

Old favourites? The Minmet stop loss was 34p (2.25p in 2003), Torotrak stop loss was 270p (17p), and Maelor was a sell at 98p (26p). Some painful memories there.

Among the others, I see I advocated selling Durlacher at 1960p (I tipped it less than a year earlier at 92p). It was then trading at 2622.5p. The subsequent capital changes would take me too much time to trace, but there was a massive slump in the price in the next two years. I was suggesting selling ARM at 3200p (49.5p in 2003) and Aim Trust at 290p (47.5p), and so on.

This is, of course, a disguised form of self-congratulation. But, once again, the real credit is due to my determination to stick to the stop loss system, not to any great genius on my part. As I admitted then, I did not know which way the market might go - but my system saved me. Heed it well.

I have attempted to reproduce copies of three of the relevant columns below. Given my inability to manipulate the technology well, I fear they could be hard to read. I apologise. The detail, though, does not matter. The stop loss message is what counts.

BE PREPARED FOR A FALL (Daily Mail February 5, 2000)

PLEASE do not think of me as the party pooper, but something urgently needs to be said. If this market should crack, you will not be able to sell before you lose an arm, a leg and perhaps several other body parts.

You know that is right. Just stop and think about it. How many times have you been left hanging on the line, waiting for your broker 'to answer in recent weeks? How long has it taken you to get through to buy or to sell?

It is not news to report that it can take an hour or two to establish con-tact. If you are unlucky - or if you have to earn your living and cannot afford to hold for more than ten min-utes at a time, it could take days to deal. There are stories everywhere of broking firms closing their doors to new clients, recruiting extra staff, and so on. If this is what it is like when the market is good, can you imagine how it will be should there be a crash?

There are hundreds of thousands of investors who have never survived a serious stock market slump - roses all the way so far in their investment adventure. Long may it be so. But, just as a matter of caution, it is sen-sible to realise that life is nasty, brutish and sometimes short when a crash does come.

A one-day fall of 200 points in the index and small investors will find that no one answers the phone for hours. When they do, prices of many favourites will be 20pc lower. Two days or more of 200 point losses- no f great disaster in percentage terms - and you can almost forget selling at any remotely sensible level.

Phone queues will stretch to hell and back, market-makers will hammer prices of anything and every-thing (remember, even the mon-strous BT lost 14bn in one day this week), widen spreads, and slash dealing size. Where once you could trade in 50,000 shares on a 4pc buy-sell spread in an active Aim stock, or something with a market value of f250m, you will struggle to sell 10,000 on a lOpc spread - or worse.

Instead of whining about share ramping on bulletin boards, anyone pretending to care about private investors ought to be worrying about this, and alerting them.

THERE is no way the problem can be washed away, no ideal answer. But all investors should appreciate the dan-ger. If your broker gives you poor ser-vice now, find another. It is easy for me to say, and hard for many people to do. But please understand that broker bottlenecks could be a killer. Do not commit more to this market than you can afford to lose, and be prepared to get stuck in stock for far longer than you would like if things go wrong.

Unless you are a long-term holder, be ever alert. Run a stop loss system. Do not hesitate to take profits quickly if you weaken.

Recognise that, whatever you may imagine, any money at all in this dizzy market ranks as a gamble.

Share Date Price Tipped Price Now Stop-Loss Action Phytopharm Jun 13, 98 86'/zp 4471I2p 380p rsl App Optical Nov 7, 98 3T/2p 4361/2p 375p rsl Robotic Tech Nov 21, 98 205'/zp 7871/2p 685p rsl Minmet Nov 28, 98 6'/zp 46p 34p rsl Torotrak Dec 12, 98 89p 3271/2p 270p rsl Durlacher Mar 27, 99 92p 26221/2p 1960p rsl ARM Mar 20, 99 479p 4391 p 3200p rsl Amstrad May 8, 99 51 p 4731l2p 375p rsl Bloomsby Jun 12, 99 265p 800p 690p rsi Mntcashel Jul 17, 99 84p 465p 365p rsl Aortech Aug 7, 99 348p 7121/2p 620p rsi AIM Trust Aug 7, 99 127p 344p 290p rsl iCollector Aug 21, A9 700p 1230p 1070p rsl Antisoma Sep 11, 99 58p 112p 96p buy Chandra Oct 30,99 116p 2431/2p 220p rsl Virtual Internet Oct 30,99 273'/zp 8621/2p 760p rsl Medi@lnvest Oct 30,99 5'/


rsl means raise stop loss

I am not predicting a crash. Your guess about the market is as good as mine. Enjoy the fun while it lasts - it is terrific.

STOP LOSS A BETTER WAY TO WORK THAN KNEE JERK (Daily Mail March 25, 2000)

THERE is this super share I am dying to tell you about, but where will the price be this week, or next week?

Or, perhaps more pertinently, in the second week of April?

Without wishing to join the doom-sters, it seems sensible not to sug-gest anything new for the moment. Next week, it might look different. For now, it concerns me that the tax year ends on April 5, and there might be many investors clinging on, hop-ing they can wait until the new tax year before they take profits.

If this uneasy mood continues, there might be fewer profits to take. But, despite the recent unease, we have had a fantastic run.Tech stocks might be well off the top but they are still way ahead of mid-summer prices.

Anyone selling before April 5 and realising gains of more than 7,100 will be liable to tax at their top rate, probably 40pc.

It is tempting to try to cling on until April 6 when there will be another year's tax-free allowance (a mean 7,200). And waiting gives the investor the use of the money for an extra 12 months.

Experience also suggests that mar-kets often lose momentum in April and May. It is possible theywill slip tower. Like everyone else, the best I can do is guess. No one really knows, and I hope we will not see any dramatic setback.

I reserve the right to change my mind at any moment, just as you should. Nothing in the share game is certain.

That is why I am serious about the stop-loss system. It discourages you from guessing and prompts you to cut losses quickly and to let profits run.

We have all seen the knee-jerk reaction which has prompted suggestions that the lastminute.com float fiasco marked the tech boom's turn-ing point. Or that the resignation of super-bear fund manager Tony Dye would mark the start of a rush back into stocks with strong `fundamentals'.

The truth is that the notion of stock market `value' or `fundamen-tals' is pretty woolly. Value is determined by the man with the wallet.If no one wants to spend 25m buy-ing a retail chain with shops `valued' at 50m; where is the value?

The current price/earnings ratio on the average FTSE 100 stock is over 31. Older investors will remember when top FTSE shares were deemed good value in a single-figure P/E.

Fashions change. The stock market is really about perceptions. If enough people see value in a PE over 30, it is worth buying such companies.

If no one wants big companies on single-figure price/earnings ratios, their prices are not going to go up. The successful investor spots which way the mood is swinging, and gets there first.

All of which is a roundabout way of saying that prudent investors will operate a stop loss to protect them against guessing wrong. That way, you keep losses modest and retain most of your profits.

The stocks in my list have taken a hammering in the two weeks since my last stop-loss list.

The biotech trusts, Finsbury Life Sciences and International Biotechnology Trust, recommended on March 3, went out quickly with losses. IBT was in at 319p, out at 298p, and Finsbury was in at 230p, out at 196p: I am sorry. Both might come again, but will require patience.

A string of others should have been sold to realise substantial profits. Some are terrific companies, and might be worth buying again when the mood steadies.

Some I will continue to follow on my www.michaelwalters.com web-site. If you did sell at my stop loss, you should be feeling relatively happy. Most have continued to fall.

Phytopharm came in at 86%p,and went out at 580p. Robotic Technology, in at 2051/2p, out at 715p. Durlacher, in at 92p, out at 2820p. ARM, in at 479p, out at 3850p. Mountcashel, in at 84p, out at 625p.

Aortech, in at 348p, out at 860p. iCollector, in at 700p, out at 1370p. Redstone, in at 120p, out at 840p. Mediainvest, in at 5 3/4p, out at 34p. Premier Direct, in at 273p, out at 400p. Maelor, in at 89.5p, out at 160p. Oxford Biomedica, in at 45 1/4p, out at 88p.

Most of those substantial gains were recorded inside a year. I am sorry to see them go, but shares are for selling as well as buying.

You must take profits, otherwise they do not count. Look on selling as an insurance policy. Sit on the cash, watch, and wait.

TIME TO WAIT FOR SUN TO SHINE ON MARKET (Daily Mail April 15, 2000)

SO how does it feel? Being steam-rollered by a serious market slump. Not too painful, I hope, though there must be many small investors with broken dreams, retired hurt, maybe out of the game for good.

Hopefully you have escaped without too much damage, or have the nerve, resources and dogged determination to hang on and hope things will get better. Suddenly, perhaps, your short-term share punt has been transformed into a long-term investment.

Sorry about that. It could take quite a while to come right if you bought in the first couple of months of this year. Some tech stock prices may never be so good again. And a few companies (far fewer than the scaremongers like to pretend) will run out of money and disappear.

The best market strategist I know reckons that selling tech stocks, even now, is still a no-brainer. He usually gets it right, and while I am not advising everyone to panic regardless, I believe it is still not too late for aggressive investors to scramble out and into cash.

Hopefully, there will be splendid buying opportunities in the next few months. The fun is certainly not over for good. As we move towards the end of the year, we could see a buying spree as investors look ahead to a decline in interest rates. Prices then might leap far and fast.

Though all appears gloomy now, market-makers have been hammering quotes on relatively small volume. Try to buy any sizeable line of stock and they cannot fill the order.

OR the moment, though, I see no hurry to recommend fresh purchases. Sit on your cash, safe in a building society. The bargains will be better as the weather warms up.

My table this week reflects the fact that virtually every stock in my stop loss list should have been sold. That is fine. The system has served its purpose well. I am sorry to have tipped a few losers, but almost every stock on the list over the past couple of years should have been sold at a profit - several with fivefold gains or better.

The table compares the stop loss prices in my list on March 11, before the most dramatic recent sell-off, with those on Thursday this week. Do check the list. It illustrates the value of a stop loss. In most cases, the shares have gone on down, falling significantly below the suggested sell levels.

Everyone hates selling. And many may be irritated that I am effectively saying: `I told you so.' But e-mails from those who follow my website - www.michaelwalters.com - confirm that many investors have sold, and are relieved that they did.

Remember - if you are daft enough to buy when I say so, you really ought to take it seriously when I suggest a selling price.

Price now Stop loss Phytopharm 442.5p 580p
App Optical 344p 380p
Robotic Tech 655p 715p
Torotrak 285p 370p
Durlacher 174p 218p
ARM 3394p 3850p
Amstrad 267.5p 410p
Mountcashel 367.5p 568p
Aortech 687.5p 860p
AIM Trust 375p 380p
iCollector 660p 1370p
Antisoma 201p 198p
Chandra 155p 300p
Virtual Internet 657.5p 820p
Media Invest 19p 34p
E-Capital 18p 25p
London Pacific 817.5p 1190p
Delyn 313.5p 190p
Premier Direct 347.5p 400p
Tepnel 89p 105p
Glenchewton 135.5p 120p
Maelor 160p 160p
Oxford Biomed 63.5p 88p
Kewill 1560p 2200p
Int Biotech 195p 298p
Finsbury Life 174.5p 196p




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