On Tuesday we sought financial advice from religion. Today, it's flying trapeze artists.
The first thing to know about them is that they always use a net. In fact, trapeze artists will practice a trick by repeatedly landing in the net, until they get it right. Only then will the catcher bother to make a trip up the rope ladder to hang in the catch trapeze and pluck the swinging flyer out of the air.
Spectators only get to see the end result of plenty of bouncing around in the net and the occasional net rash.
Because the flyers are used to landing safely on their back in the net as a matter of course, it's not a disaster when they miss the catch. They simply land in the net as usual. The investment version of this is the stop loss.
It's a predetermined point at which you cut your losses. Your pride takes a bigger hit than your money. But you get used to it and it becomes an acceptable part of investing. By limiting your losses and letting your gains run, or 'fly', you end up with a good result overall.
Just like flying trapeze nets, stop losses can be a pain in the neck if you don't use them quite right. But they're designed to protect you from the catastrophic loss that could occur. One man who's mastered the stop loss is Slipstream Trader Murray Dawes. He uses stop losses for all the trades he recommends to his subscribers. The results are similar to our Tuesday night trapeze classes. Several small drops to the net for the eventual spectacular trick coming off.
Murray's trading track record beats our aerial one. But the key point is that when you use stop losses, because the wins are so much bigger than the losses, the overall return you get is excellent. And, as Murray would hasten to add, your risk of an unexpected, and therefore unacceptable, loss is very low.
Because of Murray's trading technique, the Slipstream Trader model portfolio, which shows how a subscriber's account might fare, resembles stairs. The dollar value trundles sideways or slightly down, as some trades hit their stop loss limit, and then takes off as a string of Murray's trades pay out.
Then it's back to waiting for another opportunity. By the way, Murray reckons a period of gains has been building up in this long term range bound market. Gains for those who know how to play them, that is. For the rest of us, Murray's prediction spells trouble.
Of course, stop losses and trapeze nets aren't perfect. Our fellow classmate decided to land on her face in the net instead of on her back. That's pretty much what happens to investors when prices 'stop gap'. If the price of your shares bypass your stop loss altogether, say overnight, and drop below your stop loss, you can make a bigger loss than you bargained for.
Unfortunately, stock markets don't come with safety lines like flying trapeze rigs do. So it helps to have an experienced instructor like Murray at hand when deciding exactly where to place the stop losses.
Timing to Avoid the Kiss
Timing is the biggest factor in investing and flying trapeze. Our takeoff from the flying trapeze board, where you begin your swing, is much too fast. We just drop instead of hop, which puts us ahead of the right timing. The result can be 'kissing the catcher'. That's a mid air full frontal head butt with all your weight behind it as you drop.
If You Got It Right
The other thing that can happen is you fall towards the catcher instead of meeting him at the peak of his own swing. That's called 'travelling'. As you drop, the catcher has to carry your downward momentum instead of you both completing a smoothly arched swing together. The jerky result often ends in the catch becoming unstuck and the flyer skimming across the net and then rolling up the vertical net called the apron.
Investors can complete a perfect trick, but if their timing is wrong they'll get burned too. Investing in a fantastic company in 2007, just before the financial crisis, wasn't a great idea.
Murray Dawes never buys shares at the top of what he calls a 'widening distribution', because it's bad timing. And dividend investors can dramatically alter their long term returns by waiting for a better price.
Patience is another timing problem. Back when the Daily Reckoning's founder, Bill Bonner, first issued his trade of the decade for 2000-2010 (buy gold, sell stocks), he had to put up with being more or less wrong for most of those years. But it came good in the end, to say the least. Gold did well, shares did badly. It's pretty tough to stick with a trade for a long time though.
Doing Your Own Thing
One of the great things about flying trapeze and investing is that they're not competitive. At least not inherently. Everyone can achieve a good result that they're happy with, even if that result is completely different for different people. And you can share in others' success.
That creates a very different environment to playing ball sports or trying to run an Italian restaurant on Lygon Street. You don't see the coaches and chef's sharing their secrets. But investors and trapeze artists do all the time. ('Use your arms...knees, knees, KNEES!')
Whether you are an investor or a trapeze artist, how well you do is all about whether you're realistic with yourself. What kind of risks are you willing to take? How much time do you want to spend on perfecting your technique? What does your past performance really look like? What colour tights suit you? These are all questions investors and trapeze artists face alike.
If you think you can face them, why not try a beginner's flying trapeze lesson, or subscribe to one of our investment newsletters? Or both.
Until next week,
The Daily Reckoning Weekend Edition