Stock Portfolio Management & Trailing Stops

Stock Portfolio Management: Saving Your Portfolio From Disaster With Trailing Stops

By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
Friday, June 13, 2003: Issue #247

“We are at the peak of most likely the greatest financial mania that will ever be seen in our lifetimes and quite possibly the greatest ever witnessed.”
- January 2000 Oxford Club Communiqué cover story, by Dr. Steve Sjuggerud

I couldn’t have been clearer back in 2000 when I wrote that cover story. Unfortunately, I have a feeling that very few people took my advice to use a trailing stop in their stock portfolio management instead people just kept buying tech stocks.

Since then, I don’t know how many people have said to me, “If I’d have just followed your advice, then I wouldn’t have lost all my money I would have sold with huge profits, and would be retired today.“ My advice to these folks then - and my advice to you today - involves using trailing stops, especially if you’re holding tech stocks, which may be riding a new bubble. Utilizing trailing stops in your stock portfolio management not only secures your profits, they protect your principal and using them will ensure that you never see catastrophic damage to your portfolio.

The Stock Market Is Giving You Another Chance

These days stock investors are partying like it’s 1999 all over again. Shares of Yahoo, for example, are up nearly 200% from their lows less than a year ago. The stock is extraordinarily expensive, trading at well over 100 times annual earnings. If Yahoo continued to make the same amount it’s making, that would mean it would take a private buyer over 100 years to recoup his investment in Yahoo

Hopefully you can see that your downside risk here is huge in comparison to the upside potential in a stock like Yahoo. There aren’t too many seasoned investors our there that would pay 100 times earnings. The only hope a buyer of Yahoo has today is that there is a less savvy investor out there, willing to take the shares off him at a higher price - just like in 1999.

It’s not just Yahoo. Yahoo actually is cheaper than a basket of the major tech stocks The Wall Street Journal reports today that the stocks that make up the Nasdaq 100 (the 100 largest tech-oriented companies) now trade at more than 200 times earnings. That doesn’t mean to me that Yahoo is cheap. It means that we’re back to the strange days of 1999-2000.

So the market has given you a second chance to play your stock portfolio management the smart way. To pocket some profits instead of see them disappear. And the main key will be for you to use trailing stops. This way, you keep your upside unlimited (because we don’t know how long these less savvy investors will keep buying). And you keep your downside limited, to a 25% loss

The Secret of the Smart Investor’s Stock Portfolio Management: Exciting Stories Are Often The Big Losers

I was reading Wired magazine today. Wired is a magazine for businessmen / techies who want to stay up on the latest in the high-tech world. It is extremely well written, and fun to read. You get to learn about the “next big thing” here. The problem is, if there is any resounding lesson of the last few years, it is that the exciting futuristic companies are often the worst investments for your stock portfolio management “Pioneering don’t pay,” as Andrew Carnegie said.

Wired magazine just updated its Wired Index of the 40 most “innovative thinking” companies. The index originally came out in 1998. Only 10 of the original 40 companies even exist today. If you had invested in the excitement, you could have made a lot of money - but only if you sold in time. And the best way to have sold in time would have been by using a 25% trailing stop.

For example, Oxford Club readers at the time pocketed 900% gains in JDSU by using a trailing stop. If you didn’t use one and you had held until today, you’d have lost money on JDSU. In that case, a trailing stop made a 900% difference. I tell the full story of JDSU, including how trailing stops work, in E-Letter #118 (”Honey, What Happened To Our Retirement?”) I suggest reading it.

Wired magazine’s new Wired 40 includes the following companies: Google, eBay, Amazon.com, Yahoo, Netflix, Nvidia, EMC, Comcast, JDSU, and some biotech companies, among others. Many of these are the trendy stocks that are up by triple digits in the last few months.

My Advice for Your Stock Portfolio

Good for those companies. And good for you if you own some of them. But don’t lose sight of what happened to three of the four Wired “innovators.” They’re gone. So my advice to you today is the same as it was back in 2000 don’t let hype get the better of you in the management of your stock portfolio.

“As long as the mania continues, continue to hold and even buy the best participating companies.” But we’ll “always use trailing stops to get us out of losing positions ahead of the crowd and protect our principal. It’s a simple yet constantly understated strategy in any investor’s stock portfolio management If you have no exit plan, you have no system. And if you have no system, you won’t make money!”

Ride this rally as long as it lasts, and use your trailing stops to get you out when the music stops. Tech stocks are priced like 1999-2000 all over again. And the fall could be just as brutal.

Enjoy the ride up. And get out on the way down by sticking to your stops.

Good Investing,

Steve

Today’s Investment U Cribsheet

Trailing stops are an excellent way to prevent you from ever having big losses. See Investment U e-letter #118 for more on how this strategy can secure your big gains, and prevent big losses
I was reminded of this speaking at Van Tharp’s seminar over the weekend (www.iitm.com). Van does nice work. A good starting point to get to know Van is his book Trade Your Way to Financial Freedom.