Albert Einstein said that the measure of intelligence is the ability to change…
I like my routines. Grabbing a cup of coffee before looking at the latest cannabis news.
Getting some lunch before an afternoon of calls with CEOs and executives.
Wrapping up my reports and trade alerts.
Heading to the gym before returning home to the family.
Of course, things are different now. Instead of being able to use the professional video studio I normally have at my disposal, I’m conducting interviews at my house in the few spots I can find that aren’t currently being renovated.
Plus, the gym isn’t open, and I have to make sure my kids are being productive and not just playing Fornite all day.
The point is, we need to know how to adapt.
Learning to Adapt Is a Strength
As conditions change, we change.
Given current market conditions, we are going to suspend entering a stop loss on our trades.
With markets selling off 10% per day and sometimes rallying just as much the next, we’re far more likely to get stopped out.
Instead, we’ll jump into positions selectively, like we did with our most recent trade in NICI Membership.
That doesn’t mean the stocks we get into will not experience further decreases in price. You should be prepared for that. But these cannabis stocks will be around for the long haul. When the market turns, I expect these recommendations to rally quickly, and we could easily miss a great entry point by trying to get too cute with timing the bottom.
When conditions normalize, we’ll go back to entering a stop loss for each trade.
Now, if you’re a new member (welcome!) or you just need a refresher, I want to make sure you know the ins and outs of stop losses for when we start utilizing them again.
Stop Losses 101
Stock markets have made major moves overnight. In markets like this – and this is not the first market of its kind – stocks gap lower, often by several dollars.
Take a look at the stock price activity for Canopy Growth Corp. (NYSE: CGC).
Click to enlarge
This is a candlestick chart. Each “candle” represents the price range of a stock for one day of trading.
The vertical line covers the entire range of trading, showing you the high and low price. The fatter box around each line shows the open and close. A red bar indicates a down day, with the open price at the top and the close price at the bottom. A green bar is an up day, with the open price at the bottom end of the box and the higher close at the top end of the box.
I’ve highlighted March 11 and March 12. CGC closed at $13.35 on March 11 and opened at $11.81 on the morning of March 12.
It gapped down $1.54 overnight. Suppose you had a stop loss entered at $12.50. Well, that doesn’t mean you’re guaranteed to sell at $12.50. What it means is that your order converts to a sell order once the stock trades at, or through, $12.50.
In this case, you likely would have sold at $11.81.
There are more extreme examples, but this illustrates the point.
And here we have a chart of the S&P 500 index – which measures the performance of the largest 500 United States stocks.
Click to enlarge
You can see how significant the overnight gaps we experienced have been once the sell-off started near the end of February.
Not only do stop losses not provide nearly the protection you would hope, but they also create a lot of unnecessary transactions. This is good for traders, but we have a long-term view of the cannabis stocks we recommend.
Don Yocham, CFA
Executive Director, National Institute for Cannabis Investors
P.S. Tomorrow, March 27 at 12:00 P.M., I will be co-hosting a live Q&A session with my good friend and colleague, Neil Patel. I’ll be answering questions about current market conditions are affecting cannabis stocks, legalization efforts, and more. Make sure you register here.
4 responses to “Adapting Our Investment Philosophy During the Coronavirus”
March 26 2020