|
|
|
|
|
|
|
prepared to change their thinking to accommodate this change in the trend. |
|
|
|
|
|
|
|
|
It is more difficult to act decisively on a change when one event signals the shift in sentiment than when a number of events occur gradually over time. For example, recalling the story I told about giving back my big gain in Pfizer: When the earnings report came in under the estimates because Viagra was not continuing to sell at the same level as when it first came out, the panic to exit the stock ended up being a shift in the stock story from which, nine months later, Pfizer has still not recovered. This one event was enough in itself to keep the stock from reigniting its previous momentum. |
|
|
|
|
|
|
|
|
Because I didn't imagine the story could change so fast, I held on stubbornly rather than be one of those heading for the exits. Had I put in a stop limit order to protect my gains, I would never have had to make a mental shift in order to immediately jump out and protect my gains. |
|
|
|
|
|
|
|
|
The issue here for long-term investors to consider is how they are going to cover themselves in these sudden shifts if they have not set a clear exit goal ahead of time. More disciplined investors solve this issue by having trailing stops that they up little by little as the stock rises in price. |
|
|
|
|
|
|
|
|
Had I not been so complacent about Pfizer, that stop limit might have been set five points below the current price. Then, when a sudden shift in the stock story is ushered in by an earnings report that doesn't meet expectations and a free-fall begins, I don't have to rely on my mental agility to shift gears. If the stop is in place, the stock gets sold, and I can then sit back after the fact and try and figure out what happened. |
|
|
|
|
|
|
|
|
Related to these sudden shifts, there is some thought that more violent corrections are being compressed into shorter periods of time. For example, the three-day correction in tech stocks in the first week of January 2000 was followed by the highest and second highest point gains by the NASDAQ. For anyone unable to react swiftly enough, the short window to seize the chance to get in on these stocks at a bargain would be missed. |
|
|
|
|
|
|
|
|
Here, again, having stop losses in place would preserve a profit and set one up to then enter the stock at a drastically reduced price. But it is all happening so fast that investors are left frozen by the violent nature of the reversal and unprepared to spring into action before the window closes. |
|
|
|
|
|