Anybody else get slammed by ESCL today? The stock had tripled in the last year, then collapsed 50% this morning on news about a stamp collecting fraud crackdown in Spain. (Talk about obscure!)
The old lessons still bear repeating: diversify and preserve capital through stops. 'Nuf said.
J
Jerrod,
I just posted a message in General Comments. I got hit, but got out when it was still above $16.00.
Brian
Since this case apparently involves fraud the fundamentals (rank) becomes meaningless.
A similar situation is when a company is being acquired. The stock fundamental are no longer tied to the stock and the trade becomes an arbitrage situation.
Selling the position and replacing it with a new recommendation is probably the right couse of action.
A stop wouldn’t have prevented a major loss in this case - stock closed yesterday at 32 and opened at 16.39. Ugh!
Lindsay
I sold ESCL last monday. I saw it open today 50% down and my jaw dropped.
There have been questions in the media about ESCL for about a year or so. I think there was an article on Barrons questioning this company business rather critically. It might have come out in the second half of 2005.
Actually, Lindsay, the stop did help a bit, even though it gapped right through my stop. The stock is down another 25% from my fill point.
Brian, sorry I missed your other post. It’s right on. ESCL was one of my 20; I had a 40% gain before the drop, so this amounts to only about a 1.5% hit on my uber-portfolio. I can take a few of these, I supplse.
It will be interesting to watch this one for a pullback or complete collapse. I’m glad to be on the sidelines, rereading my Mandelbrot “(Mis)behavior of Markets”.
J.
I cant see how a stop loss on escl would be a good thing. It means that a 50% loss is better than a 60% loss. Thats why diversification across indutries and strategies is so critical. I had escl and also airm today. It was ugly but hardly catastrophic
My port got hit. Stops aren’t the answer though, especially for small caps, where hedge funds routinely generate volatile swings to trigger stops and buy shares cheap. ESCL was hit by a pretty unique event, much like being struck by lightning.
In the long-run, I think sticking to a buy-hold trading strategy will pay dividends.
I got slammed on ESCL. I had a Stop in place, but the Stop was useless as the Open was about 50% down from the previous close. I am still a big fan of Stops and would suggest your Stops be about 5% more than your comfort level so that a stock does not get sold because of volatile swings in price.
The ESCL drop is a good reason to own a diversified portfolio of 20 stocks and with each stock representing about 5% of your portfolio, the catastrophic drop in ESCL would only have affected your portfolio 2.5%.
Pissed about losing 50% on ESCL, not as pissed that my portfolio lost 2.5% because of one stock, but happy I am diversified (US and Canada) and the total of my ports contain about 20 stocks. [;)]
I’m a little confused as to why some members are so against using Stop Losses. We frequently state in this Forum that we shouldn’t trade based on ideas unless you can back test them and show that they improved the results of the Sims. I have not found a single Sim that can’t be improved by adding a Stop Loss of the right value. Stop Losses make sense and work well if applied properly without data mining.
In the case with ESCL, a Stop Loss selling at $16 with a loss of 50% right after the market opened on Tuesday is much better than waiting until you got the news in the evening after work and the stock had closed at $12.24 for an additional 25% loss relative to $16. For members that only check their stocks over the weekend when they rebalance they would now be down to $6.90 (as of 2:50 PM Wed) an additional 57% loss relative to a Stop Loss at $16 Tuesday morning. At what point do you sell a loser. If you are going to sell it at all, why not use a Stop Loss that has been verified to work well through back testing with a Sim?
I would have lost a lot more money on 9/11/01 when most of my stocks lost 50% to 80% within the first few hours. My 20% to 25% Stop Losses saved most of my capital in a situation where Diversification did not help. I hope that none of those of you who are against using a Stop Loss think that a 9/11 event will never happen again.
I have worked long hours for many years earning the money I now have in stocks. I am not willing to lose most of it because I wasn’t willing to spend 5 minutes entering Trailing Stop Loss Orders on my stocks.
Denny 
One more way to skin this cat, and there are many.
From another BB
" Minimizing loss is one valid reason for using stops; another is to preserve profit. The following strategy was submitted by a TC-2000 subscriber:
The need for an exit strategy addresses a number of points. First, it eliminates the need for subjective decisions under fire. Second, it keeps you from selling too soon and depriving yourself of the substantial benefits of letting your profits run. To make the really big gains, you usually have to ride out some corrections, and that’s never comfortable under the best of conditions. Third, an exit strategy should keep you from giving back your profit, possibly even letting it run into a loss. This exit strategy is so simple and obvious I’m almost ashamed to reveal it. It can and probably should be used as a supplement to all other exit strategies and all combinations of exit strategies. Or
can be used as a standalone. After you are once 10 percent ahead, don’t ever give back more than 66 percent of your profit. After you are once 20 percent ahead, don’t give back more than half your profit. After you are 50 percent ahead, don’t give back more than a third of your profit. You can tinker with these percentages and mold them to your own objectives and temperament if you want to. But after you’re once ten percent ahead, PLEASE don’t ever give back all your profit. Set
loss-cut and punt when you have to."
Denny,
It seems this topic comes up every few months. I agree with you - stops should be used for disaster protection. I think you handle it about as well as anyone. You leave the stop loose enough to let the stock move up and down naturally. I think you’ve said that you use it as disaster protection only - not to optimize returns. Is this correct?
There are potential problems with setting actual stops with your broker. When you set a stop loss order with your broker, you are basically hanging a neon sign on your shares, saying “I’m willing to sell my shares at this price.” A market maker’s main purpose is to trade shares. That’s how he makes his money. If he sees your stop order sitting there, and he needs to drum up some business, he is going to try to drop the price down and pick up your shares. This is particularly true with sparsely traded stocks, and especially OTC. If you broker let’s you set ‘hidden stops’, this helps somewhat.
If you like to set stops with your broker, and want to model these stops in your P123 model, you should use Low as your stop price, not Close. Close doesn’t give you a very good representation of the intra-day activity. When I use stops with small and micro caps, I find that stops as loose as 30% give the best results. This is much looser than most people recommend at other websites or publications.
Brian
Brian,
A lot of people think of stop losses as a means to reduce losses. Before P123 I used stop losses primarily for disaster protection since I didn’t have a good way to determine the effects on return. However, with the addition of proper trailing stop losses in Sims the annual return is generally increased significantly more than the max drawdown is reduced.
Since the increase of even 1% in the annual return is worth much more than a 1% reduction in the max drawdown when the effects of compounding over 5 to 10 years is considered, I now use stop losses primarily to increase my overall total returns. The fact that stop losses also reduce the max drawdown is added gravy! The use of stop losses to save me from disaster is mandatory in my mind.
I generally set my real trailing stop loss at around 5% higher than the Port’s trailing stop loss. This allows some additional volatility during the week without triggering whipsaws as often. If the Port recommends selling a stock due to a sell rule stop loss in the weekend rebalance recommendations then I sell it, no questions asked. That is what the Sim did that the Port is based on, and I test my live Sims very carefully for robustness.
I place % trailing stop loss orders through Fidelity, and the orders are not placed to the market by Fidelity until they are triggered so they are blind to the Market Makers.
Denny
I have used trailing stops losses routinely with Fidelity and have been satisfied with the results. At the very least, they offer a degree of psychological comfort that you’re doing something to protect your portfolio. However, an incident occurred in my account recently that showed that trailing stops on thinly-traded stocks aren’t completely protected from market makers.
Shares of SMXC were trading lower by about 1% when I checked on my account. I was very surprised to discover that my position in SMXC had sold. I asked Fidelity for an explanation and they said that it is the BID price (not trade price) that triggers trailing stop orders. Somehow, a very low bid on SMXC got into the system and the stop loss was executed. Nevermind that the stock never traded anywhere near that bid price! This stock has an average daily volume of only about 16,000, so it probably is easy to manipulate the bids.
So, I advise setting your stop very wide (30% sounds reasonable for volatile stocks), but not bothering with stops for low-volume stocks.
Some points:
BTW, I don’t work for Fidelity, I just trade with them.
Now a question. I thought an “alert” would be a substitute (albeit a poor one) for a stop-loss order which could work during extended sessions when a lot of the action takes place. I mean the automated kind of thing you can set up with Yahoo or Fidelity and other ways, and sends you an e-mail or calls your cell phone. However, I can’t find anything that works during the extended sessions. I have to think it’s possible because I can watch trades happen during the extended session.
Does anyone know of an automated alert thing that works during extended sessions?
TIA
Mark
Mark
Trade Station 8 platform allows full use of extended sessions and has full alert capabilities via e-mail messaging.
Paul,
Many thanks for that idea! First look at the web site looks interesting. I’m guessing you’ve used this broker. What’s you impression of them?
Mark
Mark
Best there is.
E-mail me direct if you need more on this subject.
Anybody notice this puppy’s action today?
ESCALA GROUP INC (NasdaqGS:ESCL) Delayed quote data
Last Trade: 13.12
Trade Time: 1:00PM ET
Change: 4.52 (52.56%)
Prev Close: 8.60
Open: 9.89
Volume: 17,476,770
Avg Vol (3m): 500,729