Pamplona, the Wild Investment Bulls
You remember (they show it on TV every year)the running of the wild bulls in Pamplona, Spain. Some of the nuttier people get out theircapes and stand in their path as they comeroaring down the street.
Our would-be matadors wave their home madecloaks at the bulls hoping the bulls will chargeat it and not at them. The list of casualties atthe end of the day is sometimes quite large, but, fortunately, not too many are killed.
These two participants, the bull and themake-believe matador remind me of the thosesame participants in the stock market. The bullis Mr. Market and the matador is themake-believe investor.
Why do I call him a "make-believe investor".Because as a former 17-year exchange member, floor trader and brokerage company owner I have had many clients who thought they were"investors". As a professional I would watchmany of the dumb things (like standing in frontof a charging bull with a rag in their hand)that clients would do with their money. Manytimes I could talk them out of it, but othersthey would insist on being gored.
The professional trader learns very quicklythat you cannot stand in front of a chargingbull who happens to have the shape of a stockmarket that is going full speed either up ordown. Investors love those upward moves, but a few will say I have a nice profit now so I'llcash in and take the money only to see theirstock, mutual fund or ETF (Exchange Traded Fund) continue its skyward journey.
The problem was they were guessing that theirprice was at or near the top of the move. Isthere any way to know what is the highest price? Actually 'NO', but there is a way to catch avery large percentage of the price advance andhave Mr. Market tell you when to sell. How? Letme show you the time-honored secret of thelong-term professional traders.
Stocks do not make an orderly procession to atop and then turn down in an orderly fashion. They move in stair steps up sometime 2 steps upand one step back or 3 steps up and one stepback. Many times they will rest for long periodsand consolidate. What you can do is place a stoploss order that should be moved up as yourequity advances.
Suppose you bought AT&T at $50 several yearsago and had followed it up with a 10% or 15%stop loss order. It went over $100 and thenstarted down to below $15. If you had beenfollowing with your stop you would have sold outabout $85 or $95. The charging bull when itchanged direction would not have gored you.
There is nothing to fear as long as you areprotecting your investment with stop lossorders. The bull is your friend as long as youhave protection when his direction changes.