As mentioned at the founding of this blog, we won’t give advice. But we will pass on advice from others, who – surprise! – have similar views to mine. Here’s a blog I read often, The Big Picture, with the advice entry called, “Six Rules of Michael Steinhardt.” Steinhardt’s last rule is the only one I take issue with.
The Big Picture is published by one of the smartest people on the Web, Barry Ritholtz. Not only is he smart, but his commenters are, too. It was from them that I learned a cool investing technique. It is called putting in limit orders, or stop loss orders, but I didn’t know how to do it, since I have one of those discount brokerage firms that don’t give any advice.
But I finally figured it out. I’ve only used it a few times, but the technique is good if you don’t trust yourself, or the market, or the stock you just bought. What you do is tell the computer you want to sell your stock if it gets down to or just below a certain price. If the price drops, it is automatically stopped out, or sold.
Now, there is a potential problem. You could have a stock stopped out for no reason in a “flash crash,” such as the one that hit the market a few weeks ago. The market dropped almost 1000 points in five minutes and came back almost entirely a few minutes later on May 6 this year. Scared the you-know-what out of people.
In a flash crash, you could have your perfectly good stock sold right out from under you at, say, a 10 percent loss, only to have it rebound to above where you got it in the first place. What actually happened to people, though, was that some brokers cancelled those orders, knowing that the sale was based on an illegitimate price drop.
All in all, though, stop orders are a very useful tool for individuals investors under the circumstances I mentioned above.