Friday, August 7, 2009

GT Blog August 7, 2009

Technical Analysis – myths and urban legends continued…

The implication that a stop loss strategy is for amateur investors who lack the education to understand a company’s financial statement or to dissect an earnings release is voodoo analysis. In fact any portfolio manager or CFA, CA, CIM or whatever who issues a public buy recommendation without a protective selling strategy should carry the following designation after their name - IDIOT

The biggest offender in the public recommendations game is BNN’s Market Call where on a daily basis the talking heads issue buy recommendations and never tell the viewers when to sell.

Did you buy the shares of Timminco Limited (TSX-TIM) last $1.39 when on May 27, 2008 Jean-Francois Tardif commented on his past top pick TOP PICK Timminco @ $24.05 (A Top Pick Aug 7/07. Up 238%.) “Think they can have 30,000 more tons of production. Still has confidence in this one.”

Then on July 7, 2008 with Timminco @ $27.90 Tardif is quoted (Market Call Minute) “HOLD Potential is still to come. (source stockchase.com)

I never got a call from this guy when he sold – did you?

On August 14, 2008 Michael Spring recommended Crescent Point @ $37, Sun Life @ $39.90 and Thomson Reuters @ 37.10 all without stops because he does not use technical analysis

On August 5, 2008 Peter Brieger recommended CDN Natural Res @ $75, Agrium @ $82.78 and Deere & Co @ $66.67 all without stops because he is not a technical analyst

Just to review – according to Investopedia on stops - Setting a stop-loss order for 10% below the price you paid for the stock will limit your loss to 10%. This strategy allows investors to determine their loss limit in advance, preventing emotional decision-making

So here is the tragic reality of failing to protect the downside – as an individual investor yes, you may be in for the long term but, you may be forced to sell if your circumstances change at the wrong time in the stock market cycle. Your forced sale losses at bear market lows could ruin your life. The talking heads on TV don’t have to sell – it isn’t their dough. So they can hold on through the peaks and valleys – they still get paid to wait – you on the other hand, do not

The table below sets out the above buy recommendation dates and price along with the subsequent bear market lows. Note the horrific potential losses if you had to sell at the low. The same six stock picks are listed with stops set at a simple trailing lowest low of 10-weeks ago – a 10-week low price channel – now the big surprise – four of them broke down before the buy recommendations – they were already road kill











4 comments:

Sean said...

great post. I can't see the six stocks with stop losses though...

mike2100 said...

CNBC is way worse than BNN any day. When is the last time you hear short recommendations on CNBC?

BNN just needs to get guests back on more often than once a year. They ask some guests about stop losses (but have been doing less since the rally) but not others.

Every investor should be figuring out his/her own exit strategy.

Gettingtechnical.com said...

Stop losses have been added

GT

Piazzi said...

Bill,

I do not watch financial TV often, but when I get a glimpse, and get a recommendation from an expert, my first thought is can I do the opposite and make money. If my TA tells me that I can fade the expert, I will do it. If my TA tells me not, I won't do anything because most times when I hear a story it's over

from your post, Timminco and Canadian natural became shorts exactly because I faded the experts

cheers

piazzi

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