Using A Stop Loss With The Stock Trading Riches System

The Stock Trading Riches system is designed to take advantage of stocks that are down in price. Falling prices are our friend. That is why the basic system does not use a stop loss.

I think the system has enough of a safety net because we buy low, take profits, diversify, and can always replace stocks that are no longer fundamentally sound.

However, in my book, I have an optional stop loss rule because there are many people who feel uncomfortable buying a stock that is down.

I think a fundamental stop is much more valuable than a strict mechanical stop. Before you rebalance stocks that are down, take time to read up on them, to see if there are fundamental reasons you don't want to continue to own the stocks.

For example, I had 2 deep divers for many years - Lucent and Nortel. Over three years, I only had buys, no sells, on them.

When I went to rebalance them at the end of 2008, I searched for info on them. I read lots of talk about Nortel filing for bankruptcy and whether the Canadian government would prevent it.

So, I ended up keeping Lucent and replacing Nortel. Lucent has since came back, while Nortel did go bankrupt.

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Every "Stock Trading Riches" Position is Ultimately Self-Correcting

I'm always amazed and excited when I think about how much my Stock Trading Riches system adjusts and self-corrects itself to actual market conditions.

Not only does each stock's average purchase price get adjusted through rebalancing, but even the stock itself is correctable. If you find fundamental reasons to no longer own a stock, its position can be easily switched over to another stock through rebalancing.

This is because the rebalancing formula is pure mathematics - it doesn't care if you plug in stock X or Y.

For example, suppose you were maintaining a constant value of $5,000 in Walmart and, after a particular year, your position was down to $3,000. Normally, you would buy $2,000 of Walmart.

However, if you lost faith in Walmart (for example, heard it might go bankrupt), you could choose another stock - say Target (it doesn't have to be in the same industry), sell all $3000 of Walmart, and buy $5,000 of Target.

You would then have a capital loss, and could say that Walmart was a failed investment. But, that is only if you viewed the position as a "Walmart position".

If, on the other hand, you took the view that it was a "$5,000 slot", and Walmart happened to occupy it for a while, and now Target occupies it, then ultimately it is not a failed investment.

In fact, if any given position can always systematically buy low and sell high serially across different stocks, then you can't really have a losing position in the long run.

At the high level, the "Stock Trading Riches" system is about splitting your portfolio up into constant dollar slots in which stocks are rebalanced to capture dividends and capital fluctuations. The slot can outlive any particular stock.

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Effect of Japanese Earthquake on U.S. stocks

I hesitated to write a post on how the Japanese earthquake / tsunami affected the stock market, because it is so trivial compared to the loss of life and struggle of the survivors.

When I think of the disaster, the first things that pop into my mind are the tragic deaths, admirable way the Japanese people are coping with quiet dignity, and the heroism of the engineers / operators risking radiation exposure to bring the nuclear reactors back under control.

As for stocks: Japanese insurance, finance, and manufacturing companies went down, while American construction companies like Fluor (FLR) went up because they may get a lot of business in rebuilding Japan.

Oil showed its price volatility by defying initial expectations. Oil prices had gone up because of the unrest in Libya and other MidEast nations, and it was expected that oil prices would go up more because Japan would have to buy more oil on the open market - because of damaged refineries and the nuclear plants.

The Japanese crisis may drive up oil prices before its all over but, in the short run, the price of oil actually dropped because speculators figured Japan (the world's third largest economy) would slow down and actually cause less demand for oil.

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Family Finance Carnival

The Family Finance Carnival is a great source of personal finance articles.

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Tax Carnival #82

The 82nd edition of the Tax Carnival is up with a lot of interesting tax-related articles.

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