Stop losses—systems that sell stocks if they fall by a given percentage—are a fine idea for normal stocks. When companies worth billions of dollars (or a trillion, nowadays) drop dramatically, it’s usually for a very specific reason. A stop-loss discipline gets investors out, limiting their potential losses.
Some systems calculate the volatility specific to an individual stock and generate a stop-loss trigger percentage based on that volatility. This way the stop loss is only triggered if something unusually bad happens. Smart.
Unfortunately, most of my speculations are so volatile, stop losses are of little use to me. The type of tiny exploration company that offers me a double or higher multiple on a discovery or similar milestone can easily fluctuate 20% in a day for no reason. Over a month of falling prices in the underlying commodity (copper, gold, etc.), they can retreat 30%, 40% or more—only to come screaming back up again the next month.
Sometimes the commodities themselves fluctuate this much—especially in smaller, specialized markets like titanium or vanadium. It’s interesting to note that cryptocurrencies have taken on similar volatility.
A stop loss set at 50% is pointless. If I sell based on the stop loss instead of an assessment of the company, I could be selling at the perfect time to average down. If I set the stop loss even higher, it locks in a massive loss—the very thing a stop loss is meant to prevent. But…
It’s different when the purpose is to lock in gains, rather than prevent losses.
At that point, I don’t care why an investment is falling. All that matters is that it is, and my unrealized profit is slipping through my fingers. So I set a trailing stop loss (TSL). A TSL is triggered at a percentage below the investment’s peak price after I buy—not my entry point.
This beats the old idea of selling half on the first double, or similar profit taking at set percentage, which reduces the upside if the investment keeps rising. With a TSL, I remain in my position as long as it does keep rising—or doesn’t fall much. I can realize far greater gains this way if keeps going and going, and still reduce my risk if I apply my TSL with good discipline (or have a computer do it for me).
What if the TSL is triggered for the “wrong” reason? What if there’s still plenty of upside in the speculation after I’ve sold? Well, if I really can’t find a better investment, I can always buy back in again, and probably at lower prices than I sold. But whether I do or don’t, I’ve locked in my win.
Why cry over “woulda-coulda-shoulda” thinking when I made money?
A case in point is my recent realization of a quick win on SilverCrest Metals (SIL.V), which you can see on our new public Track Record page.
I had told readers of The Independent Speculator last month that the company was doing such a great job drilling off high-grade silver and gold, the stock had risen further and faster than I expected. I was up about 80% in just six months. That was great, but the company had a market valuation larger than some junior producers on a project that had no feasibility study, let alone a mine. And it’s in a country where the populist president-elect could be very bad news for gringo companies.
So, rather than limit my upside in a company that keeps delivering spectacular drill results, I put a TSL on it. I prioritized locking in as much of my win as possible, not staying in the trade through normal volatility. Given that and my estimate of the stock’s specific volatility, I set my TSL at 10%. Not long after, the stock did start retreating, and my TSL was triggered.
When I notified my readers, one asked me why I chose 10%. If I’d set my TSL at 12%, I would still own the stock—which is back up again after the company released its best hit ever (just days after I sold). That’s true, and I certainly would not mind at all if I still owned the stock. It’s a great speculation, with a consistently high-grade silver-gold project in the hands of people who’ve made similar discoveries before, built the mine, and delivered in spades for shareholders. But the paragraph above is my answer. Given my purpose and the math, I set my TSL at 10% and sold when it was triggered.
That’s important. Successful speculators can’t let themselves fall in love with their investments, no matter how great they look. If I started fiddling with the TSL trigger because I liked the company, it would undo the reason for having a TSL in the first place.
What’s the difference between evaluating a TSL level every day and simply considering selling every day? None.
So I sold. And I didn’t get bent out of shape when the stock shot back up again a few days later. I have a great win in just a few months. I have more money than I did before. What’s to be upset about?
But sure, if the stock gets cheaper again with no bad news from the company—especially if Mexico’s new president leaves foreign mineral companies unmolested—I’d be very happy to buy back in again.
And there you have it. This is an example of the kinds of returns I have a track record of delivering for my readers. Of course, I’d love it if everyone reading this article would subscribe to The Independent Speculator, so I could help them bag the next win. But the point of this quick case study is to explain why and how I use trailing stop losses.
Remember, no gain counts until it’s realized. A TSL on a winner that’s on fire is good speculator’s discipline.
That’s my take.
