Why I Don't use a Stop Loss on Stocks
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Today we discuss what is a stock loss and why I don’t use one. For me and my stock market investing style, it doesn’t make sense whatsoever. Enjoy!
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One of the most common questions I get all the time is why do I not set stop losses? Why am I not interested in setting stop losses? So question I get so often from people, okay, and I’m gonna explain why I don’t do this in why it does not make sense for me whatsoever guys.
So first a stop loss basically means if you are in a situation where you buy a stock, okay, so let’s say you buy a stock for $10 a share, alright, you buy the stock for $10 a share, when you could do when you’re in a stock stop loss basically, is you could say, well, if these shares go under 950, then I want them sold.
Okay, I want them sold under 950. And you can also set it for certain brackets, like I only want to sell between 960 and 940, or something like that, like you can play around with it. But a lot of people just do a straight stop loss, where basically, if the shares were to go under 950, then their shares would automatically sell, you could do a Porsche, you could do them all something a lot of people just put their all their shares.
So if they buy $100, and share ABC at $10, they’ll put in what’s called a stop loss. So if those shares go under 950, for whatever reason, they automatically all get sold. Okay? There’s a lot of different reasons I want to get into one quick one, this is not the most important for sure, but I just want to get into one quick one.
First off, a lot of times after earnings, I’ve seen stocks where they go down a ton and maybe open at something like an 80. Okay, the stock opens at 80. And obviously, the person’s shares get sold at that price, right. And then I’ve seen in the same exact day, those shares come all the way back to nearly the $10.
I’ve seen times where it’s actually gone positive, okay, where this stock is down massively, and then obviously the buyers enter and then the stock just ends up going up massively throughout the day and then the end actually higher than it did but these people got screwed because they sold a a that’s just one reason but that’s actually the very very small reason compared to these other reasons.
I’m going to give you guys on why I don’t personally do it. And for you it might work for your style. I’m not saying it’s it’s bad if you want to do it, do it for your style. For me, it doesn’t make sense. It’s almost against my religion, okay. It’s almost against my investing religion.
Cuz what I do, it’s almost like have you ever seen the movie The original diehard movie, there’s a scene in the diehard movie, right? where, you know, the bad guys horns, and those guys, the they’re talking and they say, Oh, the FBI just showed up. And Hans goes, that’s all part of the plan.
And they’re like, Why? Why it is because the FBI had a shot, the electric stock going down is all part of the plan. That’s best case scenario for me. Because let’s say I buy the shares of the company for $10 a share? Well, first off, when I usually buy shares in the company, I’m buying a very small percent, okay.
I’m usually buying between 1% of my portfolio total. And sometimes it’s even less than that. Honestly, guys, sometimes I’ll put it less than 1% of my portfolio total into a stock when I initially buy it at the maximum, I will usually by about 5%. And that’s absolutely the maximum maximum, I will usually go into a stock initially.
Okay, so usually, it’s been somewhere between one to 5% of my portfolio, meaning I’m going pretty small into the stock. So let’s say I put 1% of my portfolio in this stock. Okay. So in you know, let’s say if it was 100k portfolio, okay, if it’s 100k portfolio, and you put 1% of your money, and then you buy basically $1,000 worth of this stock. Okay, so you own 100 shares of this stock.
Now, my plan is, whenever I buy into a stock, I hope it goes down, because what I’m buying this company for several years, okay, I’m buying it for several years. And and I wanted to get even bigger stake built, right? If I only got 1% of my portfolio, and I really love this company, I would love it if those shares go down much more.
Okay, so that’s kind of what I’m hoping. So the fact that maybe those shares go down, that might all be part of the plan. So let’s say these shares dropped massively. Now this would be an extraordinary situation, this rarely happens. But let’s say those shares went all the way down to $5 a share, obviously.
I would be very interested in by many more of those shares. As long as I still believe in the company, I still believe in the long term future. So then I guess what I can buy these shares for half the price I did initially and I can add a much bigger position now at this point.
Because if I was adding 1% of my portfolio, I might want to add, you know, now 10k at this point in time, if I still really love that company, and how many shares Can I get now at this point at 10,000, obviously, a massive quantity, so they’re gonna get by 2000 shares in this company now at this point, okay, so now I have 2100 shares in my cost basis is close to $5 rather than close to $10.
Okay, now, usually, I’ll buy on the dip. So let’s say the stock went to $9. Then I might go ahead and double up my position. If it dropped to $9 it drops to $8. I might double up my position again, okay, drops to $7. I might add more shares or at that point, I might buy call options. By the way, I got a call options course.
Now it goes into all different options linked in that description. It’s a second link there. It goes into all options if you want to learn about options, okay, but I might buy options at that. Because that just gives me an ability to buy, obviously a much bigger position and get much more upside.
If that stock jumps up over the next year or two, depending on how far out I buy those call options. And I can buy those call options for generally much smaller dollar amount, then I can actually buy the shares for straight up. So that’s a position I might make.
So when I’m when I’m looking at a stock, I’m obviously hoping it goes down. Okay, this so why would I set a stop loss? If I believe in this company, that’s all part of the plan, the ultimate plan is that that stock goes down. Now if it goes up, you know, and I buy for $10, and goes up to $11.
Or it goes up to $12. Or goes up to let’s say, I don’t know, $14. Okay, let’s say it goes up to $14, probably just sell out. Yeah, I had a very small position in it. But hey, I made a quick profit on that. And that’s real nice to get to take my profit and run.
But really, when I’m going into position, I’m thinking about it like this stock in the short term, it’s a 5050 chance, if it goes up or down is a 5050 chance of this stock goes up or down. That’s why I want to make a small position because I don’t know how to time the market, I don’t know how to, you know, day trade and things like that are short term trade.
I’ve never seen it done successfully over the long term from anybody ever. So I’m not risking that. And if you’re doing stop losses and things like that, and then you’re not really a long term investor and company, you’re kind of just like doing trades and whatnot, you know, and that’s a whole different philosophy than what.
I do my my investing religion is long term investing. If you’re doing stop losses, you you’re not a true long term investor. Because if you’re a true long term investor, you’re thinking like I am, oh, I buy these shares for $10, then if they go down to $8, it’s just that much better of a deal. As long as I feel just as confident the underlying company, if it goes down to $8, and I bought it for 10.
I want to buy more at this point in time, I’m gonna buy the dip, guys. So that’s what a true long term investor, if you’re short term trader day trader or whatnot, then you can do stop losses. But I just you cannot consider yourself a true long term investor, especially any type of true value long term investor, if you’re doing stop losses, in my opinion, it just doesn’t correlate, okay.
You’re more of a short term trader at that point because you’re not you’re not your mentality is way different. If you’re trying to you know, buy and sell on dips and things like that, guys, that’s a way different thing. So for me, it just does not make sense to do stop losses, you know, and, and as far as positions all time, and.
I think I’ve shared this once or twice with you guys all time, there’s only been one position that it’s 100% for sure, not worked out on that was Pandora. Okay? And the only other position it’s probably going to not work out for me, unfortunately, is GoPro, okay, so nine years of investing for me nine years of investing, and I basically have two stocks to show that it did not work out for me where, you know.
I went in and made my initial position, it went lower, I bought more shares, it went lower, I bought more shares, and it did not come back to above where I started buying those shares at two stocks ever and this one, you know, we can make an argument that maybe it still comes back or whatever, I’m not counting on that we could just count that as a loss.
Okay, so two stocks ever and and the gauntlet of stocks it has worked out on why would I change my philosophy just to maybe prevent from these two situations happening when I got 100 situations that it didn’t work out on? So that’s my philosophy behind it.
But I’m not hating on you, if you stop losses, just don’t call yourself a long term investor. If you’re using stop losses, in my opinion, that’s just not you’re not a long term investor. At that point. You’re just trying to do these little trades. It’s like you buy McDonald’s you buy an actual McDonald’s franchise if all sudden your sales go down 10% You know.
One week do you all sudden say oh, I need to sell these this McDonald’s now. No, you end up keeping that McDonald’s and be like, we need to do this and do that and things like that guys. So I hope you enjoyed this day one of the most requested you know, questions I get on the channel often is about stop losses and why don’t use them.
I hope you guys enjoy this day. Make sure if you’re newer to the stock market or you want to know exactly what I look for in a stock you click that first link in the description down there that goes into exactly what I look for and how I pick stocks guys, thank you for watching and have a great day.