FROM THE DESK OF PORTER STANSBERRY
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Compare that with a big-cap, blue-chip stock like Johnson & Johnson... It has only fallen 25% or more six times since going public in 1944, and
PORTER: Sure, it’s essentially a predetermined price you’re committed to selling a stock at, after it has fallen. Let’s say you own a blue-chip stock like Microsoft. You might tell yourself that you will sell your position when the stock drops 25%. And then – no matter what – if Microsoft drops 25%, you will sell that stock. But if Microsoft rises further before falling 25%, then you keep moving your stop loss higher so that it is always 25% below your highest profit point. This is one of the easiest ways you can protect the profits on your winners and cut the losses on your losers short. But it is a very useful tool because it can remove ALL of the unnecessary emotion that goes along with managing a stock portfolio. KEITH: I love that, Porter. Thank you. And here’s the point I would like to make today... and it is something I hope you will all agree makes sense once you hear the data for yourself. As helpful as trailing stops can be for most investors... they’re far from perfect.
they were all during massive market collapses. So, in this case, I’d argue a 25% trailing stop would be too wide . Because historically, when Johnson & Johnson has fallen in 25%, the market is in serious trouble. My point is: No two stocks are the same. So, it doesn’t make sense to use the same 25% trailing stops across the board. Which is why I simply don’t use them anymore on my own investments. Instead, we developed a different kind of trailing stop altogether. It’s called the Volatility Quotient. Or “VQ,” for short. And now it’s the basis of nearly all my investment decisions. AMY: A “VQ?”That’s not something I’ve heard before. Can you explain what it is? KEITH: For starters, you can think of a VQ as a smarter, BETTER, and CUSTOMIZED trailing stop. Every stock or fund in the world has a unique VQ. That includes mutual funds, index funds... even ETFs.
The biggest problem with a standard 25% trailing stop is that it’s a one-size-fits-all approach to every stock in the market. Let’s look back at my Advanced Micro Devices trade. Remember, it’s up over 1,000% since I first bought it.
But historically it’s had some pretty big swings. Get this... AMD has fallen 25% or more 71 times since it IPO’d in 1980. PORTER: It’s a volatile stock. KEITH: Very volatile. So, it doesn’t make sense to use a 25% trailing stop on Advanced Micro Devices because that’s a normal swing for this stock.
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