Kent,
You made a lot of good points. I have avoided stops for all the reasons you have stated. I am still trying to make up my mind on what's best, but you have pointed out a lot of good ideas on how to do it. In his article, Bill O'Neil also pointed out that he has had that happen to him many times, ie, he has set a stop, then he's stopped out, and then the stock turns around to make new highs. As you point out, this is tough to take! However, if a person uses stops, it is bound to happen periodically. This is a particular problem with the semi-equips, or any high volatility sector. The stops have to be set in the neighborhood of 15 to 20 percent below the trading range to avoid being stopped out all the time. By then, if you get stopped out, a lot of money has already been lost.
Last year for a period of 8 weeks, from 8/22/97 to 10/10/97, the group "topped out" with only a 4 percent change in group performance, up and down, over that period. The next week, closing 10/17/97, the group dropped 14 percent - that should have been the wake-up call. If that wasn't enough, the next week closing 10/24/98 the group dropped another 13 percent. During that 2 week period, essentially half of the group gain achieved from 4/25/97 to 10/10/97 was wiped out! What it had taken the group 24 weeks to achieve in price growth (the group almost doubled over that period) - approximately 50 percent of that gain was wiped out in 2 weeks. That's when "stops" were needed!:) Of course I am talking about the group and not individual stocks that make up the group. The basis idea and performance should be the same, however. A stop set 15 to 20 percent below any stock in the group would have been the smart thing to do, unless the actual top was discerned and the stock sold at that point.
I am beginning to think that even more important than setting stops is timing. By looking at the weekly performance of the group, it is obvious that no sustained rally has been underway since last fall. There was no reason on my part to jump in and invest in AFLX at 16 - I got carried away. That was 8 weeks ago - the stock closed at 7 on Friday - down 56 percent - only takes a gain of 129 percent to break even. One thing you can say with certainty, AFLX is certainly closer to its low point now than it was 8 weeks ago. Would I buy it today? No - there will be a lot of time to get back into this stock and make some money - it's not going anywhere for awhile. Book value for AFLX is $6 and change per share. The last time I looked, about 10 stocks out of the group of 41 was selling below book. Why should AFLX be any different? It could go to 4 or 5 very easily - that would be the time to start licking our chops. AFLX will be well over 16 someday, but how much better to have bought at 4 or 5 than 16 - that's 3 to 4 times the amount of stock for the same dollar investment. Sort of makes me sick thinking about it.:)
Keep the faith! One of these days, when we least expect it, the group will take off - then it will be "climb on board or get run over".
Joe, what do you think of all the happenings these days? Do you have any predictions as to when the group will begin to rise from the "ashes"?:) |
