This the editorial of our monthly Quant Value Investment Newsletter published on 2022.06.07. Sign up here to get it in your inbox the first Tuesday of every month.
More information about the newsletter can be found here: This is how we select ideas for the Quant Value investment newsletter
This month you can read more about stop-losses and how you can get them to work for you.
But first the portfolio updates.
Portfolio Changes
Europe – Hold Two Sell One
No new recommendations this month as the index is below its 200-day simple moving average.
Hold Linedata Services SA (+12.0%) and Strabag SE (+36.0%) as they still meet this portfolios’ selection criteria.
Stop loss - Sell
Sto SE & Co. KGaA +42.6%
North America – Sell Two
No new recommendations this month as the index is below its 200-day simple moving average.
Stop loss – Sell
Medical Facilities Corporation +114.2%
Leon's Furniture Limited -3.5%
Asia – Nothing to do
No new recommendations this month as the index is below its 200-day simple moving average.
Corona Crash Portfolio – Sell One
Sell TS TECH Co., Ltd. (-0.6%) as it no longer meets this portfolios’ selection criteria.
Last idea sold +56.4% average return
This was the last company in this portfolio that has now been sold. This brings the average return of the 26 investment ideas +56.4%.
No new ideas are hard
In spite of a strong recovery in May the four markets we look at did not make it above their 200-day simple moving average – so no new ideas this month.
One of the hardest things for me to do is send you a newsletter with no new ideas, but it is something we must do to help keep your losses low.
It keeps you out of the storm
The thing about not buying then a market is below its 200-day simple moving average rule is it keeps you out of stormy markets when the downside is a lot higher than the upside.
Keeping your losses low is important but it is not the main benefit of this rule. The fact that it lets you stick to your investment strategy in difficult times is much more important.
It lets you stick with your strategy because you do not have the painful memory of past losses keeping you from investing again – that is the main benefit.
You and your stop losses
I get a lot of questions about the stop-loss system we follow in the newsletter so I thought it is something you would also like to know more about.
I did not like stop losses
Until about 2015 I did not follow a stop-loss strategy.
A bit of testing I did led me to believe that a stop-loss strategy leads to lower returns, even though it did reduce volatility (large price movements up or down).
But you know we look at research all the time and, at the start of 2015 I found three papers that tested stop-loss strategies with very insightful results.
Result of the research
I won’t bore you with all the details, you can read the full article here: Truths about stop-losses that nobody wants to believe
The research clearly proved that stop-loss strategies work!
Here are the main points:
- A simple stop-loss strategy provided higher returns while at the same time lowering losses substantially
- A trailing stop loss is better than a traditional (loss from purchase price) stop-loss
- The best trailing stop-loss percentage is 15% or 20%
- If you use a pure momentum strategy a stop loss strategy can help you completely avoid market crashes, and even earn a small profit while the market loses 50%
- Stop-loss strategies lowers wild down movements in your portfolio, substantially increasing your risk adjusted returns
The difficult part - your emotions
Even if you read and summarized all the research like I did the difficult part to implement it in your portfolio is to not let your emotion keep you from selling when a stop-loss level is reached.
This is important because the most important thing to get a stop-loss strategy working for you is you MUST stick to it, not once but over and over and over again.
How to implement your stop-loss strategy
This is how you can implement a stop-loss strategy in your portfolio, it is also the stop loss strategy we use in the newsletter.
- Implement a trailing stop-loss strategy where you calculate the losses from the maximum price the company has reached since you bought it
- Only look to see if the stop-loss has been triggered on a monthly basis. If you look at it daily, you will trade too much, and the costs will lower your returns. This may look wrong but since 2015 we have found this works well as a lot of companies that fell below a stop loss during the month ends up above the stop loss level when the newsletter is published. If monthly makes you uncomfortable you can also look at the stop loss level weekly. I would not recommend daily as that will cause you to trade too much.
- Sell your investment if at the monthly evaluation date, the trailing stop-loss level of 20% has been exceeded. You can also use 15%, it works just as well but may lead to more trades.
- Measure the trailing stop-loss in the currency of the company’s primary listing. This means measure the stop-loss of a Swiss company in Swiss Francs (CHF) even if your portfolio currency is Euros or US Dollars. This avoids currency movements.
- Reinvest the cash from the sale in the next ideas from the newsletter or your investment strategy.
It will not always work
The studies all showed that a stop-loss strategy works over long periods of time. This of course does not mean that a buy and hold strategy will not sometimes outperform your stop-loss strategy.
But over the long term it will reduce your portfolio’s volatility (large losses) and increase your compound investment returns.
This is VERY important because it will help you stick to your investment strategy when the market makes wild moves!
It will also give you the courage to buy new investments, even in difficult market conditions as they are now, because you know exactly when and how you will get out should things go wrong.
System that sells your losers to invest in your best ideas
What a stop loss strategy also does is it gives you a disciplined system to:
- Let your winners run,
- Sell losing investments fast and
- Invest the proceeds in your current best ideas.
