May 26, 2020
Buying and Selling at the Exact Worst Time
By Steven Longenecker
In each American Consequences magazine, we tackle an important idea or problem…
We try to look at all sides… think through what might result… and find the best financial experts we can find on the subject. Then we let them loose.
Of course, we poke some fun as well. As P.J. O’Rourke says…
I make fun of things for a living. But over the years I’ve found that making fun of things can be an excellent way to understand them. And making fun also causes me to be a neutral referee. I don’t take sides. The absurd is the absurd whether you find it on the left, on the right, or in the middle.
But one thing we’re united on is the idea that you know what’s best for your money.
Not Wall Street. Not the politicians in Washington, D.C. And not the commentators on CNBC or even the writers in the pages of our magazine.
We do our best to give you the information in American Consequences we’d want if our roles were reversed.
Because when it comes to your money, you’re the one who has worked for it. You know how much effort it took to save.
We’re simply here to give you more perspectives than just the mainstream analysts with ever-rising price targets on stocks that everyone owns and that seemingly can’t go down. (That is, until they do.)
It’s one of the most difficult, and most important, decisions of your life…
How should you invest your hard-earned money?
They see that a lot of folks at the grocery store are all buying this new coffee system… or they hear an interesting story on the evening news about a new medical treatment… or maybe they even subscribe to a research service that analyzes companies and recommends which to buy. (Personally, we follow several such services.)
But the next step is harder…
When should you sell that investment?
That is… How can you make sure that you don’t wind up losing all your hard-won gains when things go south?
One rare bit of agreement among our American Consequences contributors is that no matter what you buy, you must have an exit strategy.
Two Easy Ways to Protect Your Gains
One of the simplest strategies is what’s known as a “stop loss.”
This is simply a specific price or percentage loss that you’ll use as a trigger for when to sell an investment. There are two types of stop losses – hard stops and trailing stops.
Hard stops are based on a set price or percentage below your initial purchase price. If the stock falls to that amount at any time, you sell. For example, if you buy XYZ Corporation shares at $100 and set a 25% hard stop, you’d sell once it fell to $75.
Hard stops work well for income-generating investments. If you purchase a stock that pays huge dividends, you may not care if the share price bounces up and down because you’re earning income no matter what.
But if you’re investing in growth companies for capital gains (that is, you need the stock price to go up to make money), then a better strategy is to use trailing stops.
They help protect your gains…
Trailing stops are initially based on a percentage from your purchase price, but then as the price rises, the trailing stop follows it.
So if you bought those same XYZ Corporation shares at $100, you’d initially set a 25% trailing stop – at first, it’d be for that $75 level, the same as a hard stop. But then as the price of XYZ Corporation increases, your trailing stop would increase too. So if the price climbed to $200 per share, your new trailing stop would be at $150.
Trailing stops only adjust upward, based on the highest price the stock hits. So in the case of XYZ Corporation, you’d sell if it fell to $150 – locking in a 50% gain.
The specifics of what stop loss to use is up to you. But they’re an easy way to keep emotions out of investing. You figure out your “rule” before you buy… then you follow it.
Some folks use an Excel spreadsheet to track their stops.
Others simply jot down a price in a notebook.
And others still, those who want the easiest way possible to make sure that they never miss an alert, use a specific piece of software… It’s a nearly foolproof way to cut your losses and let your winners ride.
And it can save you a fortune…
Thanks to a Piece of Computer Code
Most of Wall Street was blindsided by the March crash.
But on February 27, a small group of investors received an alert on their phones or e-mail inboxes that said “SELL.”
Stocks began to crash a week a later… and then fell more than 30% over the next month.
But that alert wasn’t advice from a financial guru. Instead, it was triggered by a piece of computer code from a software company. And it helped thousands of investors save their retirement accounts from big losses.
Of course, that’s in the past…
The really exciting part is what this code predicts for the future…
Despite all the market volatility thanks to COVID-19 and the botched government response to the pandemic, a small but growing number of companies are already in a strong uptrend.
These companies could mint a new generation of “recovery millionaires” as the market continues to improve. But only if you act quickly… while most investors are still too scared to put their money to work.
Now here are some of the stories we’re reading…
Despite assurances that supply chains are intact, bare grocery shelves and market closures have underscored how fragile our global production systems are, especially when it comes to food. But this wasn’t news to small-scale farmers, homesteaders, or the organizations that support them… [who] have long warned that there may come a time when self-reliance becomes imperative.
Don’t Fear the Robot
You probably know my robot. I’ve been inventing autonomous machines for over 30 years and one of them, Roomba from iRobot, is quite popular. During my career, I’ve learned a lot about what makes robots valuable, and formed some strong opinions about what we can expect from them in the future. I can also tell you why, contrary to popular apocalyptic Hollywood images, robots won’t be taking over the world anytime soon.
Study Shows 70% of Consumers Would Rather Watch New Movies at Home
Across just about every major industry sector, respondents have grown more fearful about stepping into public spaces: 39% say they’ll attend major indoor concerts less often, up from 33% in March; 36% say they’ll attend theme parks less often, up from 26%; and 33% say they’ll attend theater and performing arts venues less often, up from 29%.
John Tamny On America’s Uniquely Productive Entrepreneurial Flywheel
Why are Americans so entrepreneurially focused? We descend from “the crazies” — the other thinkers who came from around the world, dissatisfied with their lives, and willing to cross oceans and borders to get to a place that offers no security but offers freedom. They took the ultimate entrepreneurial leap. We got the nut cases. Steve Jobs, for example, was of Syrian descent. Could he have started Apple in Syria? No.
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
May 26, 2020