Stop-Loss Orders and Why You Should Never Use One

I get this question all the time.

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When I recommend a stock, I often get asked at what level should a stop-loss order be set? At what price? Or at what percentage pullback?

My answer is always the same … do not set one.

Nearly every investment professional will tell you that it is imperative to use a stop-loss order to protect yourself from sudden losses. I completely disagree. And I have the perfect example that proves why my strategy works.

I recommended Livongo Health (NASDAQ:LVGO) to my Early Stage Investor subscribers exactly 11 months ago today — on August 21, 2019. The stock has since climbed more than 220% from our buy price around $35, while the S&P 500 is up a mere 11.4% during the same timeframe.

That’s unbelievable outperformance … but it wasn’t a smooth ride.

Take a look at the chart below. As you can see, LVGO fell more than 55% just a month after my original recommendation, hitting a low of $15.12 on October 2. A typical investor would have been stopped out at a loss of 20% — or maybe even 40%-50% if they’d been a little more daring.

But we’re not typical investors. We take a long-term approach to our investments. And because we saw the big picture in Livongo and didn’t make a knee-jerk reaction to the short-term weakness, our patience has been rewarded handsomely.

Now don’t get me wrong. We will sell and bank profits when the time is right. We will also sell and take losses. But we won’t sell because of how a stock is trading.

We will only sell when the reason we bought the stock in the first place has changed.

I recommended Livongo — a recent IPO at the time — because it was a play on the future of healthcare monitoring via the Internet of Things (IoT) and artificial intelligence (AI). That story did not change in one month, so we held through the downtrend and came out much better for it.

And guess what? Livongo’s story still hasn’t changed 11 months later.

Those investors who were stopped out at 20% … 40% … and 50% losses are kicking themselves now. By staying disciplined and believing in our long-term approach, we’ve turned what could have been a 50% loser into one our strongest performers in our portfolio.

Think of it this way. If you had invested $10,000 into Livongo last August and set a 50% stop loss, you would have walked away with just $5,000 left in your pocket. But if you stood your ground throughout the sell-off, you would have turned that $10,000 into more than $30,000.

I don’t know about you, but I’ll take the latter.

Let me give you another example in Netflix (NASDAQ:NFLX), one of the biggest winners of the last two decades.

Since 2002, NFLX is up over 41,000%. That turns every $10,000 invested into more than $4.1 million.

If you were lucky enough to buy and hold Netflix over the last 18 years … congrats!

But that’s not most people. Most investors would have set a 50% stop-loss order and walked away. And those folks would have been stopped out of the stock by late 2002. Or several other times along Netflix’s amazing journey.

The following chart shows the stock’s volatile ride throughout the years. You can see a 63% pullback in October 2002 … a 76% dip in March 2005 … and then an 80% sell-off in August 2012. Even since then there have been multiple pullbacks of 30% or more.

I realize that hindsight is 20/20. Every investor knows that — and no investor will ever get it right 100% of the time. But our strategy of avoiding stop-loss orders like the plague would have made investors ultrawealthy in Netflix and countless other stocks over the years.

In fact, I would bet that there isn’t a single 100X winner out there that didn’t suffer at least one 50% sell-off at some point during its bull market rally.

Some people may think I’m crazy … but I’m okay with that. The hypergrowth investing themes we follow in Early Stage Investor and all of my investing newsletters have the potential to turn out massive winners in the coming years. And setting a stop loss on those kinds of stocks will never allow you to generate the kind of wealth that will change your life.

Don’t make the mistake that is robbing too many investors of the unbelievable profits created by the small companies driving our future.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/moneywire/2020/08/stop-loss-orders-why-you-should-never-use-one/.

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