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With no trailing stop strategy, there was no guarantee that we would stop losing money on this investment if
stock continued to slide. We might have lost 60%, 70% or even more. Fortuanately, fund behaved like Alex thought it would. The price per share quickly rebounded to over $6 in just a few days. So we need to carefully consider value trades in light of trailing stop.
JDS Uniphase: A Perfect Run-Up in Stock Market
And now we've come to our quintessential example of power of trailing stop: JDS Uniphase. Even though story is almost five years old, it defines profit-making power of trailing stops like no other. In March of 1999 we heartily recommended JDS Uniphase. We said then that "it would be company that would create next great fortune," and it "is one stock investment that you don't want to miss."
We placed normal 25% trailing stop on it.
It turns out this was sage advice, as stock had a perfect, even breathtaking, run-up. It rose from our recommended price of $10.95 (split adjusted) to $110.12–a whopping 905.66% in 14 months. But amazingly, during that entire stretch, stock never had a real pullback in market. Without 25% trailing stop strategy, it would have been tempting to sell some or all of it at 100% or 200%. Had we done that, we would have missed out.
When stock reached $150 we were still in it, and subtracting 25%, lowest price we would sell this stock would be $112.50. As it turned out too, $150 was high point for stock. Of course we didn't know this at time, nor did anyone else. But that's great thing about trailing stop system–it takes "guesswork" out of trying to determine a stock's value. We let market tell us when run is over.
The trailing stop system always keeps us from losing our shirt and always locks in our profits when a stock has had a significant gain. How many times have you heard of investors saying they made 100%, 200% or more–only to give it all back when stock corrected? That's not happening with our system–sure, we may give back a little, but we're always locking in profits on our winners.
If JDS Uniphase had continued to rise above $150, we would have been along for ride. But in this case, $150 was top, and it gives one a great feeling knowing that even if worst were to happen–a stock collapse–we would have a huge 905%+ profit. That's beauty of 25% trailing stop strategy.
The Rest of Story–Don't Buy and Hold
JDS Uniphase also provides a dramatic example of benefits of our system versus perils of holding and hoping. As we said above, we took more than 906% profits from this investment. JDS was a grand slam for us.
Unfortunately, for investors who don't use a trailing stop strategy, JDS is also perfect example of "big fish that got away." From its high of more than $150 per share, stock has plummeted. As of July 2004, JDS was trading at a little over $3.28 per share–that's about a 97% drop from high. That's power of a trailing stop strategy–it can mean difference between taking more than 900% profits and losing 97% of your investment's value.
Use Daily Prices in Your Stock Market Investment Strategy
We use end-of-day prices for all our calculations, not inter-day prices. You should too. This makes things easier. If a stock has gone to $100, put a mental stop at $75. If, subsequently, stock closes at or below that $75 level, sell your shares next day.
The Oxford Club's web site features daily updates and posts on our recommendations. The instant one of our stocks triggers our trailing stop, we immediately post notification on web, so that you can take immediate action. This means that you don't have to follow stock yourself or worry about when you should sell.
Remember, key is discipline. This is a good technique. Stick to it. Choose a broker who understands trailing stops and will do work for you.
Stock Market Investment Advice You Can't Afford to Miss Out On
If you use a discount broker or trade on Internet, there may be times when you are moving your stop up each day–even when you are on vacation (that's a great problem–it means you're making money). We know that most people need time away from stock market to recharge their batteries. Each person has to decide whether it pays to go with a full-service stock broker who can run their investments for them. To help with this decision, we initiated our Oxford Club Safety Switch e-mail service. Now, any time one of our recommendations hits our trailing stop, we immediately alert our members via e-mail.
One thing about life is certain: You are never going to know future. Nobody–even most astute analyst or investment advisor–can know enough about a particular company, industry or nuances of stock market to anticipate with 100% certainty future price of a stock.
But common sense dictates two investment fundamentals:
1) Taking small losses is much better than taking big losses. 2) Letting your profits run is much better than cutting them off prematurely.
Using trailing stops is best first step you can take to greatly improve your portfolio's return. Follow this time-tested technique of world's greatest investors and your investments will outperform those of your friends, neighbors and even your fund managers.
This is first step to having a coherent, reliable system that will let you sleep at night and give you satisfaction of knowing you're maximizing your profits.
Once you apply trailing stops, you'll be that much further ahead of ordinary investor.
Now, you're ready to go to next level in our 'Stock Market Investment Advice' White Paper–and learn next secret of world's greatest investors...
Secret #2: Go With "Low Risk"–And Then Let Your Winners Run
(See Part 3 of this white paper by searching this web site by Author's Name for ‘Steve Sjuggerud.’)
Dr. Steve Sjuggerud is editor of the Investment U newsletter and serves as Chairman of Investment U and the Oxford Club's Investment University. He helps people become better investors with actionable stock market investment advice they can put to use to build their portfolios.
