Is there any way to limit losses?
That is probably the question that gets asked most frequently, and limiting losses is probably something that is attempted by almost all investors at some time in their investing careers. Most of us know what happens when the "Big Boys" try to limit their losses, but what happens when you try to limit the losses of a WEIMERandWIRTH portfolio?Brokers and other "experts" lead many investors to believe that losses can easily be limited. This belief is likely to enrich your broker, but the data below show that you are far more likely to limit profits when you attempt to limit losses.
I examined all the picks that were candidates for dissemination since 2009Q1. Most of the picks that I examined were recommended to subscribers. Those that were not recommended were indistinguishable from those that were recommended. The average return of all picks every quarter was compared to the average return of all picks if picks had been sold after a drop of 5% thru 50% in 1% increments. Here are my results:
Data for 159 picks chosen during 2010Q4
Normal 3 month average return for these picks was a gain of 18.8%
7.4% gain if all that fell 5% or more had been sold
14.4% gain if all that fell 10% or more had been sold
18.6% gain if all that fell 15% or more had been sold
19.0% gain if all that fell 20% or more had been sold
19.2% gain if all that fell 25% or more had been sold
19.1% gain if all that fell 30% or more had been sold
19.0% gain if all that fell 35% or more had been sold
19.0% gain if all that fell 40% or more had been sold
19.0% gain if all that fell 45% or more had been sold
18.9% gain if all that fell 50% or more had been sold
The BEST return that would have been experienced with premature
selling would have occurred if all that fell 25% or more had been
sold. Note that this 19.2% return is more than the normal 3 month
average return of 18.8% for picks purchased during 2010Q4, but this
would have required the ability to predict that 25% was the magic
number, AND it assumes that sales could have been successfully
executed at the magic 25% number.
Data for 122 picks
chosen during 2010Q3
Normal 3 month average return for these picks was a gain of 18.2%
4.9% gain if all that fell 5% or more had been sold
8.4% gain if all that fell 10% or more had been sold
12.6% gain if all that fell 15% or more had been sold
15.2% gain if all that fell 20% or more had been sold
17.0% gain if all that fell 25% or more had been sold
18.0% gain if all that fell 30% or more had been sold
18.1% gain if all that fell 35% or more had been sold
18.1% gain if all that fell 40% or more had been sold
18.2% gain if all that fell 45% or more had been sold
18.2% gain if all that fell 50% or more had been sold
The BEST return that would have been experienced with premature
selling would have occurred if all that fell 50% or more had been
sold. Note that this 18.2% return is identical to the normal 3 month
average return of 18.2% for picks purchased during 2010Q3.
Normal 3 month average return for these picks was a loss of 5.7%
2.9% loss if all that fell 5% or more had been sold
5.3% loss if all that fell 10% or more had been sold
5.3% loss if all that fell 15% or more had been sold
5.5% loss if all that fell 20% or more had been sold
5.8% loss if all that fell 25% or more had been sold
6.3% loss if all that fell 30% or more had been sold
6.4% loss if all that fell 35% or more had been sold
6.1% loss if all that fell 40% or more had been sold
6.1% loss if all that fell 45% or more had been sold
5.7% loss if all that fell 50% or more had been sold
The BEST return that would have been experienced with premature selling would have occurred if all that fell 5% or more had been sold. Note that this 2.9% loss is better than the normal 3 month average loss of 5.7% for picks purchased during 2010Q2, but earlier data show that placing 5% stop loss orders would almost certainly compromise performance during rising markets.
Data for 109 picks chosen during 2010Q1
Normal 3 month average return for these picks was 11.3%
9.7% return if all that fell 5% or more had been sold
12.3% return if all that fell 10% or more had been sold
12.5% return (BEST) if all that fell 14% or more had been sold
12.2% return if all that fell 15% or more had been sold
11.7% return if all that fell 20% or more had been sold
11.4% return if all that fell 25% or more had been sold
11.1% return if all that fell 30% or more had been sold
11.3% return if all that fell 35% or more had been sold
11.6% return if all that fell 40% or more had been sold
11.5% return if all that fell 45% or more had been sold
11.4% return if all that fell 50% or more had been sold
The BEST return that would have been experienced with premature selling would have occurred if all that fell 14% or more had been sold. Note that this 12.5% return is more than the normal 3 month average return of 11.3% for picks purchased during 2010Q1, but this would have required the ability to predict that 14% was the magic number, AND it assumes that sales could have been successfully executed at the magic 14% number.
Data for 82 picks chosen during 2009Q4
Normal 3 month average return for these picks was 10.1%
4.4% return if all that fell 5% or more had been sold
5.0% return if all that fell 10% or more had been sold
5.3% return if all that fell 15% or more had been sold
7.2% return if all that fell 20% or more had been sold
7.9% return if all that fell 25% or more had been sold
9.6% return if all that fell 30% or more had been sold
10.0% return if all that fell 35% or more had been sold
10.1% return if all that fell 40% or more had been sold
10.1% return if all that fell 45% or more had been sold
10.1% return if all that fell 50% or more had been sold
The BEST return that would have been experienced with premature selling would have occurred if all that fell 40% or more had been sold. Note that this 10.1% return is identical to the normal 3 month average return of 10.1% for picks purchased during 2009Q4.
Data for 64 picks chosen during 2009Q3
Normal 3 month average return for these picks was 18.7%
6.7% return if all that fell 5% or more had been sold
12.2% return if all that fell 10% or more had been sold
20.1% return (BEST) if all that fell 15% or more had been sold
18.7% return if all that fell 20% or more had been sold
18.9% return if all that fell 25% or more had been sold
18.9% return if all that fell 30% or more had been sold
18.8% return if all that fell 35% or more had been sold
18.8% return if all that fell 40% or more had been sold
18.6% return if all that fell 45% or more had been sold
18.6% return if all that fell 50% or more had been sold
The BEST return that would have been experienced with premature selling would have occurred if all that fell 15% or more had been sold. Note that this 20.1% return is more than the normal 3 month average return of 18.7% for picks purchased during 2009Q3, but this would have required the ability to predict that 15% was the magic number, AND it assumes that sales could have been successfully executed at the magic 15% number.
Data for 60 picks chosen during 2009Q2
Normal 3 month average return for these picks was 37.6%
10.0% return if all that fell 5% or more had been sold
23.0% return if all that fell 10% or more had been sold
28.9% return if all that fell 15% or more had been sold
33.1% return if all that fell 20% or more had been sold
34.7% return if all that fell 25% or more had been sold
34.3% return if all that fell 30% or more had been sold
35.3% return if all that fell 35% or more had been sold
35.0% return if all that fell 40% or more had been sold
34.8% return if all that fell 45% or more had been sold
35.4% return (BEST) if all that fell 46% or more had been sold
35.3% return if all that fell 50% or more had been sold
The BEST return that would have been experienced with premature selling would have occurred if all that fell 46% or more had been sold. Note that this 35.4% return is considerably less than the normal 3 month average return of 37.6% for picks purchased during 2009Q2.
The data above are more or less consistent with all the data I collected after 2001, and it may help explain why I believe an attempt to limit losses will probably result in a reduction of profits. These data show that there may occasionally be an advantage to selling at a predetermined drop, but there will probably be a disadvantage. The unknowns are when it may be an advantage AND the amount of the drop. More data will be added as they become available.
However, there are definitely circumstances under which premature selling will save a pot of money. If you know the market is going to decline during the next three months, then get out, or better yet, short the market. The problem, of course, is that nobody knows where the market is going to be in the next three months, or even in the next three minutes.