October 20, 2008
Dow Down – 508 points
For Sale – Lightly Used Toilet Seat
Recently when the kids went off to college we decided to upgrade their bathroom which was also being used as our guest bathroom. The toilet seat was getting a bit raggedy and had to go. But also the seat had never fit quite right around the bowl, and that had always bothered me.
So off to the Home Despot we went. And with our big orange shopping cart we navigated to the toilet seat aisle.
Wow, never knew there were so many choices in the world of toilet seats. We picked a reasonably priced white seat that seemed to be the right size and headed home.
I got on my hands and knees in front of the porcelain god and immediately had a flash back to the ugly end of a drinking binge from my Sophomore year in college. Anyway, off came the old seat and on went the new one when — guess what – nature called.
But once that was done and I stepped back to inspect my handiwork, I knew something was wrong.
It turns out that the toilet bowl, which been installed by the previous owners of our house, wasn’t a standard size. And the new seat, well not only didn’t it fit right, but it actually hung over the front edge of the toilet bowl – looking not unlike a big ugly white pelican.
Now the question becomes - what to do?
I mean, think about it, you can’t just take a toilet seat – one that’s been “broken in” so to speak – back for a refund. I could put an ad in the local recycler paper, but what would the ad copy read –“ Toilet Seat For Sale – Lightly Used”?
Do you think I’d get a lot of takers?
Somehow this made me think of the stock market.
Today stocks stink!
I mean they really stink.
Warren Buffet (whom I respect) can take out ads in the papers exhorting us to wade back in, but it rings a bit hollow like George Bush’s exhortation back in 2001 after 9/11 that the best, most patriotic thing we could do at that time was to shop!
Stocks today are like my lightly used, but ill-fitting toilet seat. They have some value, but they just don’t fit right. But the problem is most of us aren’t quite ready to return them.
So we sit on them and just keep on flushing…
Which leads me to today’s survival tip.
At your service,
Marc
Concise Advice to Help You Thrive in Challenging Times
Survival Tip #4
Stop Flushing Your Money Away – Use Stops
I have to tell you that I avoided a potentially much larger loss in our retirement and college accounts this year (and last year as well) by using stops.
What are stops?
Investorwords.com defines a Stop Order as “A market order to buy or sell a certain quantity of a certain security if a specified price (the stop price) is reached or passed.”
There are two kinds of stops – what I call “in the market” stops and “out of the market” stops. An “in the market” stop means I’ve instructed my broker or keyed in a stop loss price in my online trading account that is entered into the market that publicly states I’m willing to sell X shares of Y Company if the prices falls to or below Y dollars.
All well and good you might say. This is cheap protection.
But since my stop loss order is actually in the market, the market meanies can manipulate the price of that stock during intraday trading to take me out – in other words, force me to sell my position at an artificially lowered price. And then guess what, the price goes back up above my stop. Ouch!
That’s why I like “out of the market” stops. But then if these stops are out of the market – in other words not entered as standing sell orders – then how can you protect yourself?
I use a service called Trade Stops I enter in my purchase price, and how much I’m willing to let the stock go down before I want to sell it. It could be 20% off its high since I bought it or 15% off my purchase price. How much risk you want to take is up to you. Then I get an email alert at the end of any trading day that any position of mine has hit its stop loss price.
If it does hit my stop loss price I do not sell it immediately on the opening bell the next day. Instead I have a rule (a hard learned trading rule). I wait 24 hours. I wait until the next trading day to see if the stock continues its fall or if it corrects itself.
If it keeps falling I sell. No questions, no attachments, just goodbye.
Anytime, I fail to do this, I regret it.
This means that when my stock in Wachovia Bank, which I bought at $44, fell 20% from its high of $54, I sold it 24 hours later and got $44 for it. (It’s now at $6, having cratered to just over $1 in recent intraday trading.)
This trade stop stuff has saved my butt big time.
And in today’s volatile Wall STreet environment, the good news is you won’t have to watch your positions all day (it will just make you crazy anyway – trust me). You can let Trade Stops do the work for you and then in the quiet of the night you can make a rational decision, based on the hard facts, about what to do next.
Sleep well.
