Updated: May 3, 2013 12:14PM
When should you sell? That's the most difficult question for a buy-and-hold investor to answer. It's so much easier to think about buying stocks, which only requires a basic optimism that future growth will create wealth. Who wants to think about selling -- a decision that is far down the road?
Traders, on the other hand, are always thinking about when "enough is enough." They're willing to lock in a profit without remorse, even if the stock goes higher. And they're willing to take a loss quickly, without "hoping" that the stock will rebound.
Successful traders have a unique characteristic that allows them to conquer emotions such as hope and dismay, greed and fear. That characteristic is: self-discipline.
It's the defining force that winnows out the successful traders from the losers. And it is in short supply among investors, who tend to panic at market extremes.
Now a new service called SmartStops.net has been created to give ordinary investors a dose of automatic self-discipline, advising them in advance when to sell a stock or Exchange Traded Fund that they own. It's done through a tool few investors use -- the "stop-loss" order.
A "stop-loss" order is a sell order, placed on your broker's books, telling them to sell "at the market" when the stock falls to a specific price. It is designed to protect profits from evaporating when a stock declines. And because it can be set for one day, or an "open" order -- sitting and waiting in case the stock falls to a certain level -- you don't have to be watching prices all the time. Almost every broker will accept a stop-loss order on a stock you own.
But what sell price should you specify? Is it just a matter of percentages, or does it depend on past levels where chartists find "support" in past performance? Is it a matter of volatility, in both the stock and the market?
SmartStops.net CEO Brent Collins and Chuck LeBeau, director of analytics, say the formula includes all of those ingredients and many more. They've created a daily warning service telling traders and investors where to set their "stop-loss" orders for the following day.
Says founder Brent Collins: "There's a huge segment of investors that don't have the tools to monitor the market, or make the right decisions to sell when there is risk in the market. Most of all, they don't have the discipline to take immediate action. They don't have an exit strategy."
LeBeau, a longtime market technician, won't reveal details but says their secret algorithm starts with the assumption that the market has three directions -- up, down and sideways -- so the formula changes depending on the trend. But it's not just conventional market "charting" that sets the recommended stop-loss points.
SmartStops.net monitors nearly 5,000 listed stocks and ETFs that trade at more than $5 per share and average at least 40,000 shares in daily trading volume. After the close, it sends subscribers an e-mail, giving both short-term (selling time horizon of less than six months) and longer-term stop points for the securities registered in their portfolio, so they can place their orders. Then subscribers get an e-mail alert when the stop-point is reached, so if they haven't already placed an open stop-loss order, they can call their broker to sell.
In fact, the company has recently partnered with TD Ameritrade -- and is close to signing other major brokerage firms -- so subscribers can have their stop-loss orders entered automatically, instead of having to call their brokers.
They point out that an analysis of the S&P 500 over the last 10 years reveals that 486 stocks (97 percent) experienced at least one price decline of 25 percent or more! And 347 stocks (69 percent) experienced at least one price decline of 50 percent or more. That's the kind of loss they are trying to help investors avoid.
The price is right. You can set up a portfolio at SmartStops.net, and the first three stocks you list are free! That is, you'll get the daily e-mail and alert e-mail for free when you create your portfolio. If you want to add 10 stocks, the cost is $9.95 a month. Larger portfolios cost more. Obviously, they're betting on the fact that users will see the value in their service.
And what if they are successful, too successful? Could all those stop-loss orders become a trigger point for aggressive traders who want to cause further market declines? It's a practice known as "gunning for the stops."
LeBeau responds: "I don't see where our impact is any different than a major brokerage firm making a sell recommendation -- if they ever had the guts to tell their clients to sell a stock! We believe that individual investors deserve to have timely sell advice -- and they aren't getting that from Wall Street."
Now that's The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd.