Why I Run “Ultimate Trailing Stops” on All My Investments

Keith Fitz-Gerald Oct 29, 2014
30 

You’ve spotted an unstoppable, trillion-dollar trend. You’ve identified the stock that’s set to benefit most and made a trade using the tactics that will squeeze the most profit out of it.

Nicely done.

Now it’s time for the final piece of the Total Wealth strategy.

Mention the words “Risk Management” and most investors get a look that’s somewhere between “bored” and “terrified.” It’s not that they don’t want to control risk; they’re just not sure how and they don’t make it a priority.

Yet the most direct path to building a fortune is not losing your money in the first place.

All you really need is a handful of tools – which I’m going to walk you through one by one in the coming weeks – and the discipline to enforce them.

One you’re probably already familiar with is a Trailing Stop. They’re usually automatic sell orders set at a specific % below the market price of the investment you hold or at some predetermined $ amount of risk on a given investment. While people typically think of Trailing Stops as downside protection, in fact, they can be used to lock in profits, too. That’s why I recommend using them on almost every investment.

But few people use what I call “Ultimate Trailing Stops.”

The Most Direct Path to Building a Fortune

Before I show you the power of Ultimate Trailing Stops, we need to spend a minute talking about why risk management matters.

As I said, the most direct path to building a fortune is not losing money.

I know that sounds obvious, but it’s not to the vast majority of folks.

DALBAR data shows that individual investors consistently underperform the broader markets. Over time they fall farther and farther behind, eventually dooming themselves to terrible results that they’ll never make up.

Many investors like to think that this is because they haven’t found the next “Google” or “Apple” or “Microsoft.” I suppose that’s true on some level, but in reality there’s plenty of opportunity. So much so, in fact, that from 1993 to 2013 almost every investment sector outperformed the average individual investor who achieved an annualized return of just 2.53% over the same time frame.


That’s why I started Total Wealth.

With the six trends, the right tactics, and a few risk management tools, chances are you won’t be left behind – and in fact, you may even beat the market for years to come.

Truth be told, there are thousands of ways to prevent losses. This isn’t anything new and there’s certainly no lack of literature on the subject. In fact, a quick spin around the Internet reveals tens of thousands of articles covering everything from simple trailing stops to esoteric methods like synthetic hedging that you’ll need a PhD in astrophysics to understand. That’s NOT what I’m talking about here.

What I am talking about is installing another layer between you and the proverbial sell button.

Here’s a great place to start.

How to Use Ultimate Trailing Stops

Like many investors, I want to make money every day with everything I own. I realize that’s not always possible but that doesn’t stop me from trying. Chances are you feel the same way or you wouldn’t be here.

But what matters is how I approach the markets.

From the moment I wake up to the moment I go to bed, I think about what’s going to cause me to lose money. That may surprise you, but it shouldn’t. Many professional traders are the same way. They know that profits will come if they can consistently identify what will cause them to lose money, and they take steps avoid it.

For me that’s ultimately a very simple process – hence the moniker “Ultimate Trailing Stop.”

Here’s how it works.

I ask myself every single day if the reasons why I bought something are still there and still true.

  • If the answer is YES, then I’m content to hold on through thick and thin. I’m not concerned about short-term market fluctuations and, in most cases, will actually use any decline to buy more because I am confident that capital is a creative force and that the markets will continue to grow as earnings do.
  • If the answer is NO, then I’m gone like the wind in that old JJ Cale song “Call Me the Breeze.”
Five Reasons I Like Ultimate Trailing Stops

  1. They work on any investment in any asset class, even if you prefer Crayolas to computers to track your results
  2. They are valid in up, down, and sideways markets
  3. They help frame your thinking so that you are never caught by surprise again
  4. They can help you prevent catastrophic losses and capture monster profits
  5. They are so simple truly anyone can use them

In that sense, an Ultimate Trailing Stop gives you the perspective needed to buy, hold, and ultimately sell any investment successfully and, more importantly, as profitably as possible over time.

Here are some examples of what could trigger an Ultimate Trailing Stop.

…is the CEO still in place and do I like his vision as a leader?

For example, I loved Steve Jobs, the founder of Apple Inc., but don’t have confidence in his replacement, Tim Cook. Apple’s earnings are slowing. The company oozes MBAs rather than innovation these days. The entire marketing strategy is based on “me, too” from Apple Pay to the iPhone 6. It’s all a game of catchup to me. So I won’t go near the company anymore and have recommended shorting it several times when the technicals merited a high probability move.

…has there been a game-changing development in the industry that obviates the product suite?

Tesla Motors Inc. springs to mind here as the “game changer.” I think Elon Musk is the most innovative CEO on the planet and that his vision is very threatening to Detroit and to the conventional auto industry in general. So I’m perfectly happy to recommend Tesla, even though it’s clearly going to be a bumpy ride.

…are there new competitors changing the game?

Whole Foods Market Inc. is a great example of a company that built its business on nothing more than the fact that it was the only game in town. Prices were so high that the company got the unfortunate nickname “Whole Paychecks” because that’s what it took to shop there, according to many consumers. But now Trader Joes, Sprouts, even Costco are jumping in, and Whole Food’s margins are rotting away like old vegetables. It’s not surprising to me that the stock has dropped from $65 a year ago to $38 today.

…is there an opportunity cost to remaining with the company?

Right now I think that’s what people who hold Amazon Inc. should be asking themselves now that Alibaba is on the scene. BABA is going to outclass AMZN in just about every category and will rewrite the internet as we know it over the next few years. Can you really justify holding Amazon at a trailing PE of 798 when BABA’s trading at a mere 45 and backed by 1.4 billion customers? It’s no wonder that Amazon recently got a $14 billion haircut following bad earnings in afterhours trading. I believe there are compelling reasons to switch horses. On a related note…

…is price in line with value?

When I recommend buying stocks, for example, I formulate an opinion as to what I think something is worth. If a stock increases to that point, I’m the first one to recommend scaling out or rebalancing into other holdings that are undervalued. My goal is not so much to set a hard and fast target as it is to enter a range and stay there.

Obviously, I’ve just scratched the surface here.

I can think of a whole host of other questions you may want to add to your own list depending on your individual perspective, risk tolerance and time horizon.

…has something changed for the worse?

…do I have to sell because I need the money?

…will selling help me rebalance to buy more upside?

…if I don’t want to buy it today, why am I not selling?

…is the smart money leaving?

There is no single answer that’s right for everybody. Ultimately, that depends on you – pun absolutely intended. The Ultimate Trailing Stop is the mental backdrop behind any investment decision. It’s uniquely yours and tremendously personal.

The point is, again, I’m really not concerned with short-term market gyrations. I’m talking about investments here… not trades. So most of my questions are fundamental and oriented to the longer-term approach that leads to profits over time. You may have a different perspective.

In practice, you may not need to check your Ultimate Stops every day, like I do. In fact, you may not want to, lest you risk letting your emotions get the better of you. You may want to revisit once a year to see if your Ultimate Trailing Stop has been triggered on any of your investments.

I’ll be back soon with a look at the one number that’s made thousands of headlines this month…

Best regards for great investing,

Keith

30 Responses to Why I Run “Ultimate Trailing Stops” on All My Investments

  1. REUBEN ABRAHAM says:

    LOVE YOUR APPROACH AND ADVICE. THANK YOU VERY MUCH FOR THE SUGGESTIONS AND EDUCATION.

  2. juan capello says:

    Do you upgrade your trailing stop as the investment increases in value–Thx

    • Keith says:

      Absolutely – that way you can catch the majority of any run while minimizing losses at the same time. Thanks for asking – Keith 🙂

  3. Brian Clayton says:

    Keith,
    The above column is exactly what I need. I’m losing the fight, not really knowing the technicals of what I’m investing in. Perhaps I am following the investment newsletters too much. I don’t have the ability to do the research you are doing, of course. I have a pretty high risk tolerance but the way things are going, I need it! I follow you, Michael Robinson, Shah, etc. but have not really gotten a solid portfolio of growth & income investments. Income is pretty important now as I’m retired and things are changing so fast that I can’t seem to keep up. And then, I hang on too long to losing investments, even though I subscribe to Trade Stops.
    Frustrated, to say the least. Thanks for all your help.
    Brian

    • Keith says:

      Thank you very much for being part of the family and for the kind word Mr. Clayton. I will do the best I can to help you achieve the future you envision.

      Best regards for great investing,

      Keith 🙂

  4. Joe Buhler says:

    Agree with a lot you say but not in Apple. Maybe you should talk to your Money Map colleague Michael Robinson about them!

  5. H. Craig Bradley says:

    In the world of “trades” we often must accept the “trade-offs” that are part of the deal. One of them concerns robotic “Trailing Stops”. I see the reason and accept the logic of risk management, but also acknowledge its a trader’s strategy at its core. Not surprisingly, Keith is a professional (institutional) trader and approaches investments from that perspective ( vs. dumber “retail investing”). Keith uses this term in such a relative context in person. Its not a criticism, just a simple observation.

    Now, my “beef” with categorically employing trailing stops on all stock holdings is some stocks Keith recommended in past articles harness the power of compounding in quality dividend paying stocks, like Altria ( MO ). Most recently, Keith and others ( Bill Patalon) at Money Morning vigorously advised readers to invest in Alibaba (BABA) for future long term portfolio growth and scale down holding in Apple ( refer to previous Articles at Money Morning). Now I understand and agree with both recommendations and have already been doing so for some time before the articles, but that’s neither here or there.

    What is important is if you use trailing stops on any stock in a volatile market like we have once again ( after the FED announced the “end” of QE and potential interest rate hikes next year ( Its ALWAYS “next year), then eventually they will each probably stop-out sooner or later. Then you have a taxable event and a commission, even if only a single digit one, and cash to redeploy.

    Do you then redeploy the additional cash in the same quality long term growth and income stocks like Altria (MO) or in some other stock or sector? Just remember, each time you incur a capital gain and state income tax on the trade if a gain occurs. I assume it does, as the stated reason for the trailing stops is to “preserve gains” whenever possible. Costs count in the long term and turnover incurred to manage portfolio risk has its own unavoidable costs, mostly increased tax liability.

    Robotic approaches to any market kind of bother me and Keith has a sincere motivation to help ( educate) individual investors. So my “criticism” here is also sincere. You have to remain flexible and sensitive to your own needs and approaches, while at the same time remaining open-minded to new ideas or suggestions. There is no one size fits all, which is part of what makes investing so difficult, yet so promising. An independently minded-person like myself can synthesize all the inputs and pick what makes the most sense for my financial health. Nobody but the markets and the long term results can discipline me for bad choices.

    Nobody is going to bail me out when I make a bad ( “wrong” ) choice. Nobody is going to bail you out either, not the Federal Government or ANY politician. Nobody is going to give me a thing in this world either. We live or die by our wits and let me tell you, there are A LOT of “dumbed-down” half-wits in America ( Bill O’Reilly, The Factor, Fox News). Therefore, way too many of my fellow Americans are potentially the biggest threat to your financial health than any terrorist organization (ISIS) could possibly be. I fear all things considered, that the all odds are still against us in the long run.

    • Tom says:

      Very rare to see such a gigantic display of negativity within your article. Happy that I am not a relative or co-worker. Hope your investment choices are better than your attitude. Wish you the best

  6. Ralph says:

    Very glad to be a member of your elite group,…honestly mean that.
    I am holding pcrfy with a fair chunk of money. If your portfolio has a stock that you think will do much better in the shorter term like pozen, would shifting some money from pcrfy to pozen in the short term be a way of utilizing money that I think won’t be moving before pozen? There are other stocks wiithin my portfolio with the the same time line ideas. Any suggestions on this?

    • Keith says:

      Good morning Ralph. Thanks for being part of the family and for asking.

      What you are really contemplating is a form of rebalancing by any other name. The key is to take the emotion and decision making out of it and, instead, replace that with market action. Studies show that the human element is the biggest cause of poor performance. I’ll have more in upcoming columns.

      Best regards,

      Keith 🙂

  7. Joe Mackey says:

    You say “Ultimate Trailing Stops” on ALL your investments! But, your portfolio has some listed as protective stops and a few as trailing stops. Is that a difference, since I would have to watch each investment for the stop. I guess that means to get out on a protective stop . Am I right?

  8. Barry Sorkin says:

    Hi Kieth,

    Regarding stocks u suggest in 6 unsstoppable trend series only

    . Are we always supposed create a trailing stop? , U noted to do so with KTOS , butr not with EKSO which is so small can easily triggere one

    1.. So in the future will u always please let us know when per recommendation if we should do so or not ?? as with penny stocks like Ekos it can stop out immediatel

    2. Also if a stock gets a dividend are we to readjust the cost basis and reset the trailing stop ? which iss something I am not suire I know how to do ??

    3. Finally when does a new total wealth column appear dueing the week,??

    I ask as I love that u noted once to get ready for an announcement Re Ekos on friday earlier in that week, but was luckily near my still desktop as am disabled when KTOS came out and would like to be ready encase another trend related recommendation or tactic realting to 1 of the picks, like u did with EKOS gets announced via e-mail

    Thanbks & keep up the inciteful work

    Barry

  9. Lou Canfield says:

    I like the article.

    • Keith says:

      Thanks Lou – it was fun to write because it covers a topic that Wall Street simply won’t talk about yet which can benefit us all.

      Best regards,

      Keith 🙂

  10. Mark Rossiter says:

    Craig Bradley…Your comments are honorable and well put. Keith offers great ideas and methods, as does Oxford Club writers. Tax events are too consuming for me to employ the trailing stop mechanisms, and it may be easier to write about than to deal with the whipsawing that will occur.

  11. Ted in Texas says:

    Do you ever worry about Market Makers looking at your stops and artificially lowering prices temporarily to stop you out at a cheaper price? I’ve heard of that but never observed it (that I know of).

    • Keith says:

      Great question, Ted.

      Worry really isn’t the right word, but I do think about them a lot because of the games they play. That’s why every tactic I put forth is intended to give you the advantage by taking away or reducing their ability to “play” individual investors. Trailing stops, limit orders, even options are great ways to make sure your investments are on your terms. So is the right perspective.

      Best regards,

      Keith 🙂

  12. H. Craig Bradley says:

    Commentor Tom is apparently not powered by logic and facts (reality) as much as by emotion, as he politely couched my comment as “gigantic display of negativity within the article” He pleasantly wishes me the best, despite my “attitude”. Very gracious.

    We Americans are dominated by emotion more often than logic. We want instant gratification and our egos are overwhelming at times. We often interpret events and individuals from the point-of-view of the “self”. This elevates personality as the dominant consideration often times. What a misperception.

    Next, we compound our mistakes by (mis)characterizing people based on our limited perceptions of the world, not necessarily the world ( and markets) as they really are. That is possibly a cultural blind spot for many and potentially a fatal mistake, as well. We don’t seem to learn. Possibly something to do with intelligence (I.Q.) and family upbringing ??
    Here is a fact: My investment opportunities are potentially unlimited and my financial resources significant. I have lots of time, probably 25 more years. If I don’t want to swing at the ball, I can walk just as well to first base. I am in no hurry and can bide my time for the right opportunity. Surprisingly, doing anything at all costs me money.

    So, whether what I spend results in an increase in my net worth is another matter. I feel VERY blessed and “well endowed”, as well. People need me way more than I need them. Any relationship is therefore of an asymmetrical nature. That’s reality, not perception, at this point in my life. Too bad more people can not attain what I already have.

    The odds are really against most of them ever getting there and are unlikely to improve much if voters continue to make poor elective choices ( be stupid) at the polls. We do not live in a consequence free environment. Too bad for them. Glad I am me and not one of the so-called “Jones” in the neighborhood- or anywhere else in the U.S.A.

    I still have my freedoms, thank God. However, nothing is “a given” any more. Enjoy life day by day. Count your blessings. Money is not happiness in itself, but take it from me, it sure helps. ( see related Joke about money by the late comedian, Joan Rivers).

  13. Linda Santucci says:

    I am relatively new to portfolio investing. This is the first I have known the term “ultimate trailing stop”. Do not know the difference from a trailing stop. However, I believe it is reasonable always to include current news and timing when using any trailing stop. I can also lose money if the stock sells automatically at some point previously established, and work against the bottom line of a portfolio. One should be able to integrate changes and be able to adjust a trailing stop accordingly, so it does require close observation to make a change as needed.

    • Regina says:

      Hi Linda. Good luck with your investments. I believe Keith’s point was that in addition to trailing stops, his ‘ultimate trailing stop’ is your own perception of the investment when reviewed periodically — would you still buy it today or have things changed (irrespective of the stock price itself)?

      Someone above asked about whether market makers sometimes manipulate the price to stop out a group and then have the price go back up. I have heard that it does occur, and it is a risk. I suggest using a tool like Trailing Stops to let you know when to enter a sell rather than having the limit sell order just sitting there. Another possibility is that some brokers allow you to enter a conditional order which isn’t posted to the market makers until the condition (e.g., a stop price or trailing percentage) is reached.

      Thank you Keith for your educational articles and financial investment advice.
      Cheers all.
      Regina

      • Keith says:

        You are absolutely correct Regina and that’s great counsel. Thanks for jumping in here. I love that fact that we can help each other in our pursuits. It was one of my big hopes in starting Total Wealth and now that it’s happening I couldn’t be more proud of the Family we’re all creating together.

        Best regards,

        Keith 🙂

  14. John Strader says:

    Hi Keith,

    I have been a subscriber to your newsletter for about 10 months. I have been a successful investor for the past fifty years and have averaged about a 12% annualized return on my investments (not all of these investments have been in stocks, bonds and financial instruments). I was a CPA in public practice for over 20 years. During this time I read and subscribed to many different advisory services and financial investing services. Yours is one of the best and I have learned a lot from you. I think you do a very good job advising your clientele and while I have differences of opinions on certain stocks for instance my opinion on Apple and Tesla are the exact opposite of yours I appreciate your point of view and opinion on the stocks.

    I have a couple of questions regarding your current position on biotech, drug, and medical stocks. I was attracted to your service originally by your observation that there was a tremendous opportunity in the health services industry because of Obama’s new health law. You recommended FBT and I followed your lead and purchased it and three other closed end funds HQH, HQL, and THQ in these sectors. I understand why you recommended we sell FBT – it got ahead of itself but you really haven’t followed through with the health industry and I think you were right on point with your initial analysis of what was going to happen to this group. Is this just a distraction and focusing on other things or do you think things have changed regarding health care? I have always tried to invest in trends like this. The medical trend and the internet and related industries seem to me to be the major trends that will make the most money in the next 2 to 5 years along with banks once the Fed starts raising interest rates and you don’t seem to be really keying on any of these trends.

    I appreciate your efforts on my behalf and the other members of your service, I would appreciate an answer to my questions, keep up the good work.

    Thank You, John Strader

  15. Michael Upper says:

    Trailing stops are a double edged sword. Numerous times during the last 6-7 years I have been stopped out of excellent investments merely because traders drove the price down to where they knew a certain number of investors had stops. So the traders artificially drove the price down to where investors like me had 25-30% stops in place. They stopped us out at those prices then within 1-3 or 4 days they let the price go back up where the small investors, like me, would have to pay more for the shares than they were stopped out at. Small investors, like me, do not trust the basic integrity of the markets because of the unstable Federal Government monetary and fiscal policies and the concurrent VIX. So we, the small individual investors, repeatedly get screwed on our investments. My most recent experience was LNG where I had at one point 800-900% gains. I got stopped out when the market went down 2-3 weeks ago only to find that the stock had a large uptick and I would have to buy back in at a much higher price than I got stopped out at. DDD was another personal example for me a couple of years ago. With the unstable economy and markets showing symptoms through the VIX we cannot afford to not let some of our best investment decisions leave us. In the end small investors really do not belong in the stock market driven and controlled by traders with huge amounts of money to manipulate the market.

    Just some of my experiences and thoughts!

    Thanks Keith for your excellent services. You are just about the only person I listen to anymore.

    Michael Upper

  16. Mrs Jimmie K Niebaum says:

    Keith,
    I didn’t read enought info why you buy a stock and how you determine the value of it. What should the Market a Cap be and what should the avg Volume be ? I don’t want to buy just any stock!

  17. Richard McNairy says:

    I took your recommendation on KTOS and obviously it has dropped over 30%-not good and I did not have
    a trailing stop-how bad is this going to get?

    Dick

  18. Richard McNairy says:

    Ktos-sell it or stop my loss?

  19. chet says:

    what % do you use for a trailing stop?

    • William Dahl says:

      Hi Chet,

      Keith will typically recommend a trailing stop of 25% with each recommendation, as his research shows that that’s the best range to allow a stock to endure normal ups and downs on its way to new heights while also protecting its holder from a harmful loss. The rule isn’t set in stone, though, and readers can expect to see the trailing stop percentages vary on occasion.

      Regards,

      William Dahl, Assistant Editor

  20. Joe Swann says:

    Keith,
    I just listened to some of the Jim Rickards interview and almost want to sell 100% of my stock market exposure and go to gold/silver, land and other hard assets (ammo and guns). I’m holding some cash and very skeptical of putting it to work in the markets. Is there ever going to be a point where the fine team at Money Map Press tells us all to head for the hills? I still own several diversified mutual funds in addition to the individual stocks that I pick up based on some of your teams recommendations. I should probably put stops across my holdings, including the mutual funds. Typically I only employ stops on individual stocks.
    As I look to the new year… man this is depressing to think all the years of playing by the rules and living a frugal life to enjoy an early retirement have been for naught. Seems like the “savers” are going to be crushed no matter what we do. Shame when your own government has become the biggest threat to your personal future.

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