A great Article...

By John Waggoner, USA Today

One definition of madness is doing the same thing over and over, and expecting different results. If you have tried to snatch up a cheap stock in the past six months or so, you're probably questioning your sanity. Cheap stocks just keep getting cheaper.

For people who like bargains, stocks remain tempting. Many stocks are lower now than they were a decade ago. Before you decide to dive in again, however, make sure you have an exit strategy. You'll save yourself some money and, sooner or later, you might lose that twitch.

For many years, selling a stock was considered something that was Not Done, like bringing a clown to a funeral. After all, stocks always went up. Patience was the only answer to a stock tumble.

These days, however, those who hesitate are often lost. Say you bought 100 shares of Bank of America on Dec. 31 at $14.08. Price: $1,408.

You could have argued that Bank of America, the nation's third-largest bank holding company, was a cheap stock. It had already fallen 63% since Oct. 1. And it sold for 2.3 times its estimated 2010 earnings. (The price-earnings ratio, or P-E, measures how cheap a company's stock is relative to its earnings. The higher the P-E, the pricier the stock. Bank stocks typically sell for lower P-Es than most other stocks, but 2.3 is still inexpensive.)
Cheap or not, BAC wasn't a great buy. By Thursday, BAC closed at $3.93 a share, meaning you have lost $1,015, or 72%. In short, you've suffered a devastating loss: To get back even after losing 72%, you have to gain about 270%.

Ideally, you'd like to sell before taking such a huge loss. But how do you decide when to sell a stock?

Dan Chung, chief investment officer for the Alger funds, has a few general rules about selling. If the company produces a startling earnings disappointment, for example, you should consider selling, he says. You might also consider selling if you think another stock has better potential.

But you should also set a limit on how much you are prepared to lose the moment you buy a stock. One way to make sure you stick to that limit is to use a stop-loss order, which tells your broker to ditch the stock if it falls to a specific price.

You can put in a new stop-loss order every day, using a day order, or you can specify that your stop-loss will be good until you cancel it. (These orders don't last for all eternity; depending on your broker, they may last only six months or so.)

The next question: Where should you set your stop-loss order? In most cases, setting the stop at a 10% loss makes sense. You'll have to earn 11% to get back even, but an 11% loss is not a fatal error. Had you set a 10% stop on your Bank of America investment, for example, you'd be out about $141, plus commissions, rather than $1,015.

A stop-loss might not help in all circumstances. If your stock is down 10% when the Standard & Poor's 500 is down 15%, for example, it's holding up reasonably well. Some highly volatile (and low-priced) stocks will move up and down 10% pretty frequently. And, inevitably, you'll have some stocks that fall 10% and promptly rebound.

"Basically, we're talking about controlling risk," says Chuck LeBeau, director of analytics for SmartStops.net, a website that tells you when to sell. When you buy a stock, LeBeau says, you can't control how much it will go up. But you can limit your losses by using a stop-loss order.

SmartStops.net uses proprietary formulas, based on a stock's general direction and its volatility, to determine when to sell. The stop recommendations change every day. You can monitor a portfolio of three stocks or exchange traded funds for free, or get five stop recommendations a day for free.

If you're thinking of selling a mutual fund, which is typically a longer-term holding, then you need to examine the fund's record against other, similar funds over time. By and large, if a fund has lagged behind its peers for the past one, three and five years, it's time to ditch it. The chart shows five funds with assets of more than $1 billion that fit the sell criteria.

One place to get further guidance: The website FundAlarm, which is aimed at telling you when to send your fund to Palookaville.

Many investors have been burned enough by this market to sit on the sidelines for a while. If you're brave, or even mildly mad, be sure to have a sell point in mind the moment you buy.

John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. new book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com.

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So Much for Buy-and-Hold Advice

So Much for Buy-and-Hold Advice
You bet on stocks. You diversified. You lost a bundle. Should you get out? Experts disagree.

SmartStops comment: In this day and age diversification offers very little protection and can even make things worse. You need protection on a stock by stock basis using SmartStops.

Excerpts: They were reassured that stocks have the best long-run returns, so they plowed their savings into the market—only to watch in dismay as government bonds outperformed stocks over an entire decade. Moreover, investors were lectured again and again on the wisdom of diversifying their portfolios internationally. So they did. But foreign markets have done even worse than their U.S. counterparts lately. The most exasperating example is Japan, whose key stock market index is now back to where it was in 1981.
What many investors have failed to realize is that "the long run" can sometimes be very, very long. So says London Business School economist Elroy Dimson, co-author with his LBS colleagues Paul Marsh and Mike Staunton of the 2002 book Triumph of the Optimists, which challenged work by University of Pennsylvania Wharton School professor Jeremy Siegel, author of Stocks for the Long Run. The climb back into the black after a fall can take even longer outside the U.S., says Dimson. In Italy, he says, stocks failed to keep up with inflation over a 73-year period through 1978.
But even in the absence of such a doomsday scenario, international diversification doesn't always lower the volatility of returns—because in major crises, stocks fall in every market. Thus, in 2008 global diversification isn't protecting investors from the financial crisis that originated in the U.S. In sum, two pillars of investment advice—buy stocks and go global—have proved to be weak reeds lately. No wonder pundits such as Jim Cramer, the CNBC stockpicker, are sounding off about "how the best way to invest is not to buy a bunch of stocks and just sit on them."

Link to full article:

Retirement accounts have lost $2 trillion

Retirement accounts have lost $2 trillion
By JULIE HIRSCHFELD DAVIS, AP

SmartStops comment: Elderly investors can no longer rely on Buy and Hold in today’s volatile markets. It may take too many years for the prices to recover. Investment portfolios need the protection that SmartStops can help to provide.

Excerpts: WASHINGTON -Americans' retirement plans have lost as much as $2 trillion in the past 15 months, Congress' top budget analyst estimated Tuesday.
The upheaval that has engulfed the financial industry and sent the stock market plummeting is devastating workers' savings, forcing people to hold off on major purchases and consider delaying their retirement, said Peter Orszag, the head of the Congressional Budget Office.

More than half the people surveyed in an Associated Press-GfK poll taken Sept. 27-30 said they worry they will have to work longer because the value of their retirement savings has declined.

A new AARP study found that because of the economic downturn, one in five workers 45 and older has stopped putting money into a 401(k), IRA or other retirement savings account during the past year, and nearly one in four has increased the number of hours he works.

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Dividend Cuts Hit $22.5 Billion in 3rd Quarter

Dividend Cuts Hit $22.5 Billion in 3rd Quarter
Standard & Poors press release

SmartStops comment: Investors in high dividend stocks often believe that they can ride the market up and down with little concern over declines in the stock prices .(As brokers used to joke in down markets- the yields are simply going up.) But what if the dividends that help protect the stock prices start getting cut? Based on the current news in this article, even dividend investors might benefit from the protection provided by SmartStops.

Excerpt from article: New York, October 3, 2008 - Standard & Poor’s, the world’s leading index provider, announced today that 138 of the approximately 7,000 publicly owned companies that report dividend information to Standard & Poor’s Dividend Record decreased their dividend during the third quarter of 2008, representing a 557% increase from the 21 issues that decreased their dividend during the third quarter of 2007. Reported dividend increases fell 21.2% to 346 from 439 reported in the third quarter of 2007.
“It was the worst September for dividends since we started keeping dividend records in 1956,” says Howard Silverblatt, Senior Index Analyst at Standard & Poor’s. “During the second quarter, companies were nervous and cautious. The third quarter, however, saw many companies deciding to take action, and that action took $22.5 billion out of the pockets of investors.”

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Fannie, Freddie: The biggest losers

Fannie, Freddie: The biggest losers

Investors in Fannie Mae and Freddie Mac face massive losses when trading opens Monday.
By Colin Barr, senior writer, Fortune

SmartStops comment: Only a few months ago these stocks were considered safe investments that were widely owned by banks and conservative institutions. Now FNM and FRE are close to worthless. (SmartStops would have had you out in the mid $20s on June 9th.) If you think that you own quality stocks that are so safe that you don’t need protection then you are clearly mistaken. Even the preferred shareholders are in trouble. Look at the list of supposedly knowledgeable investors and financial institutions that could have saved fortunes by simply using SmartStops.

Excerpts: NEW YORK (Fortune) -- Big investors in Fannie Mae and Freddie Mac face a brutal Monday. Shares in the mortgage giants, which have already lost 90% of their value over the past year, are likely to plunge anew in the wake of the government's announcement Sunday that it is taking control of the companies and ending the payment of common and preferred dividends.
The prospect of a virtual wipeout of existing Fannie and Freddie preferred shares could lead to declines Monday in the shares of regional banks and major insurers that hold the shares. Among the holders of Fannie and Freddie preferred issues are Genworth Financial (GNW, Fortune 500) and MetLife (MET, Fortune 500).
The government intervention comes just over a month after Legg Mason's Miller reported a sizeable purchase of Freddie shares. Miller came to fame with a 15-year run of beating the S&P 500. But that streak ended in 2006, and since then his Legg Mason Value Trust has lagged far behind the market.
Miller's run of poor results hasn't made him any less aggressive, however. He has owned Freddie shares for some time but has been doubling down on the company as its shares plunged over the past year. Legg Mason owned 15 million shares at the end of 2007, when Freddie stock was fetching $34 a share in the market. He then boosted that figure to 50 million in the first quarter, as shares dropped into the teens in the wake of the collapse of Bear Stearns, and 80 million at July 31, when the price was below $10.
If the outlook for Freddie shares - which closed Friday at $5.10 but traded as low as $3.50 in the after-hours session when news of the Treasury plan began to circulate - is bleak, one ray of hope comes from the March collapse of Bear Stearns. Those shares were to be sold to J.P. Morgan Chase at $2 apiece in a Fed-brokered rescue of Bear, but the shares traded sharply above that level for a week, until the deal was renegotiated at $10.

Link to article:

WHEN TO SELL

When To Sell Stock: Here's The Best Tool For Knowing When To Unload Your Investment by Alexander Green, Chairman, Investment U.

SmartStops comment: Another excellent article from Alexander Green, the Oxford Club’s Chairman of “Investment U”. However we would disagree on a couple of points. The article suggests a 25% trailing stop but our SmartStops formulas have been proven to work much better.
(See our comparison study)

Also the article says: “Under no circumstances should you lower your stop.” As you have observed our stops are frequently moved further away as volatility increases so that they are not triggered by random price action. That is one of the important pieces of logic that makes our SmartStops so much more effective than a simple 25% trailing stop.

Excerpts: Anyone can buy a stock. The art of investing is knowing when to sell stock.
There are a number of theories about when to cash in your chips. But most of them are misguided. And some are completely wrongheaded.
For example, any analyst who urges you to sell a stock because the market is about to tank is immediately discredited, in my view. While there are certainly many bear markets and bull markets ahead of us, no one - and I mean that literally - has ever demonstrated any proficiency at warning investors in advance.
If there is truth to any of the great maxims of Wall Street it's this one: cut your losses and let your profits run. Selling a rising stock, by definition, is not letting your profits run.
There is, however, one sell discipline that forces you to do just that. It's called a trailing stop. And if you're not using one to protect your stock positions, you should be.
A trailing stop is simply a stop-loss order set a certain percentage below the market - and then adjusted as the price rises.
Traders, who are short-term oriented, will always want to run their sell stops closer than long-term investors. But even a short-term trader shouldn't run his stops too close to the market. Why? Because no stock moves up in a straight line. And you don't want to get knocked out of a winning stock while its just going through its normal fluctuations.
There is plenty of research to back up the idea of running trailing stops, incidentally.

Link to article:

The Best Way to Lose Everything

The Best Way to Lose Everything
by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club

SmartStops comment: Excellent article and great example of the pitfalls of over confidence and lack of diversification. Reminds me of the well known hedge fund manager (he wrote a book) who was proud of the fact that he never used stops. He has now gone completely broke twice in the last few years losing all of his investor’s money and many millions besides.

This true story is intended to point out that there is often the assumption that good traders don’t need stops. Actually they need disciplined stops more than the bad traders. Unfortunately the bad traders are doomed to go broke quickly whether they use stops or not. Meanwhile the good traders will survive and be around for a long time. The good traders will be making many trades through all sorts of unusual and risky market conditions. They all know that sooner or later they will be glad they used stops.

Excerpts: Back when I was still managing money 10 years ago, I had a client who transferred in a rather sizable account. There was only one problem. Over 90% of his net worth was tied up in a single stock, Ericsson. He refused to use a trailing stop or sell a share of it or even to use a position sizing strategy.
I warned him it was crazy to have his entire financial future riding on one stock, especially since he was retired. "That's what everybody keeps telling me," he said. "But the stock keeps going up. I'm glad I ignored them all."
I congratulated him that the stock had appreciated so nicely. But I reminded him there might come a time when it didn't do so well. But he was stubborn. He wouldn't part with a share. Furthermore, he grew weary of having the same conversation. He transferred his account out again.
You may already know how this story ends. From a high of over $105 in March 2000, Ericsson took a breathtaking dive. It traded at less than $5 two years later. This is the kind of mistake - especially when you're already retired - from which recovery is simply not possible. However, I sometimes see other investors making similar mistakes.
Everything we do - asset allocation, trailing stops, position-sizing and stock selection - is done with an eye to not only maximizing returns but also limiting risk.

Link to article:

High Beta Stocks: Do They Offer Higher Returns?

High Beta Stocks: Do They Offer Higher Returns?
By Roger Nusbaum

SmartStops comment: This article points out that going after higher returns by taking on added risk is not necessarily a good idea. It also points out that the holding period for many “fad stocks” should be limited to only “a couple of years give or take.” We agree. Here is an alternative idea: In order to get higher returns you might occasionally consider taking on a few “fad stocks” with a high Beta and then use SmartStops to limit the risk. Now that sounds like the best of both worlds.

Excerpts: A high-beta stock is likely to have its day in the sun, but eventually it will start to rain. Pick any internet stock from the bubble. Chances are it gave ten years', or more, worth of appreciation from 1998-1999. The person who sold his net stock on Dec 31, 1999 and never went back had a different experience than someone who held on to internet stocks too long. This is true for every stock market fad. Success with the next fad will not come from holding forever; it will come from holding for a couple of years, give or take.
When I write about beta I use the word volatility, not risk. Increasing risk is really not something people want to do. They may want to increase volatility to capture a general rise in the market, but there is never a good time to absorb an 80% hit to one of your stocks.

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