Apprenticed Investor: Protect Your Backside
A Fool & His Money
Using a modest stop-loss strategy, you could have bought Enron at its peak and limited your losses dramatically. Here's an example of how even an outrageous calamity like Enron need not be a total nightmare to a well-prepared investor:
Let's say someone was foolish enough to rely upon the sell-side analysts' "strong buys" on Enron in 2000. Our hypothetical investor -- let's call him Kenny Boy -- got suckered into Enron at the worst possible time, buying 1000 shares at its peak price of $90.
When he bought the stock, Kenny employed the very simplest loss limitation -- a straight 15% stop loss. He placed a "good till canceled" 15% stop loss order at $76.50. (Next week we'll go over a variety of stop-loss techniques.)Towards the end of the year, Enron had broken $80 and was sliding further south. By mid-December 2000, the stock was flirting with Kenny Boy's stop point. Soon after, Kenny Boy was "stopped out" of Enron at $76.50. Still, Kenny Boy's a sucker. He read a few positive articles on the company with titles like
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