A Trading Secret - Why Buy And Hold Will Not Work

Posted on February 4, 2007
Filed Under Stock Market |

Its so easy today to invest in the stock market. Place your order, press submit and you instantly can become a shareholder. Ask any officer of a publicly traded company, and they will tell you, they love when shareholders buy and hold. This helps the price of the shares retain its value (instead of selling their shares like everyone else, they hold, avoiding an even larger drop in share price). While you probably wouldn’t consider driving downhill without brakes, why would you buy and hold onto a company that is losing you money? This is where an investment plan comes in.

Why Buy And Hold Will Not Produce The Results You Think They Will

A stop loss order is basically a set of orders for the sale of your stock at a specific point-generally when they fall below a certain price. This isn’t a guarantee against loss but it is a very important line of defense. You can choose the stop loss price based on a percentage drop in the price or even certain patterns. Some brokers will even set your stock-loss price higher as the value of your stock rises in order to protect the maximum possible profit on your behalf.

Folks who comment that the buy and hold strategy of investing works, will simply point to Warren Buffet. The world’s most effective investor has the good name of someone who lives and breathes the buy and hold strategy. Unfortunately, its not completely exact.

Unlike you and I, Mr Buffet is in a position to buy a controlling interest in the companies that he is investing in. This gives him the power to help innovate and make notable decisions about who will make the decisions in the boardroom. As a shareholder of the company, he has the ability to make companies more effective by removing dead weight. Any decisions that the company makes that require stakeholder consent will have to be ratified by Mr Buffet in order for them to go through. So, unless you are able to purchase as many shares as him, you’re only recourse is to sell if you don’t like the direction the company is moving in.

When public companies declare bankruptcy it is quite rare that stockholders will receive any kind of compensation whatsoever. Stop-loss orders are a great way to prevent this from occurring.

Here’s a great saying that should help you remember the important of a stop-loss order: “If the smart money has sold and moved on, what type of money still owns the stock?”

Tags: Stock Market

A Trading Secret - Why Buy And Hold Will Not Work

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