The world is unpredictable, use stop losses

Stop-Loss , Volatility

This article is a website version of our weekly FREE Best Ideas Newsletter sent on 21.03.2023. Sign up here to get it in your inbox every Tuesday.

First Silicon Valley bank and now Credit Suisse.

Is this the start of another financial crisis? I don't think so, but it just proves what the behavioural psychologist Daniel Kahneman said, I am paraphrasing:

The only conclusion we can draw from unexpected events happening all the time is that the world is unpredictable.

That is why it's important to have a system in place to keep your losses low.

I have to remind myself this all the time because I'm always trying to see patterns and then adjust my thinking accordingly. What I do a lot is thinking that events like this are just the first domino that's falling, and that there will be a lot of other similar events soon.

This thinking is bad for my returns because it keeps me out of the market for irrationally long periods of time, causing me to lose out on attractive investment ideas because I hesitate.

So even though I'm careful at the moment, I'm going to make a few investments over the next few days just to stop me from freezing up. With position sizes smaller than usual.

What stop loss strategy do I follow?

After last week's newsletter where I wrote I sold a few companies that hit their stop losses, a subscriber asked if I also follow a 20% trading stop loss that I look at on a monthly basis.

You might remember this is exactly the strategy we follow in the newsletter.

My answer is that I do, most of the time.

If I own a very volatile stock, I may follow a 15% trailing stop loss that I look at weekly. Remember, as with most rules in investing there is not just one right answer. The right answer is what works for you and lets you sleep comfortably.

You can of course not use any number or rule. That's why we do a lot of back testing and look at research papers to see what has worked in the past over up and down markets.

For example, the research we did on stop losses found that a 15% or a 20% stop loss work best.

For the newsletter we selected 20% to keep your trading costs low while at the same time keeping your losses low.

Helping you keep your losses low analyst

PS I know markets are still uncertain BUT have you already started building your buy list? If not, why not sign up today and start now.

PPS It is so easy to forget and put things off, why don’t you sign up right now?