First Dick Smiths, now Masters? Just how do you sidestep these doozies when deciding to allocate capital? For years I’ve labored here at MB on why risk management is more important than actual stock selection. Permanent loss of capital is always worse than missing out on an opportunity.
From The Chartist comes this formidable chart and quote to remind you that struggling companies go through a similar price pattern:
And why just listening to brokers will send you broke fast, this was the consensus before DSH went into voluntary administration:
And if you think technical analysis is voodoo BS, here’s the current weekly chart for Woolworths (WOW), owner of Masters. I’ve overlaid the closely watched 200 day moving average with two weekly moving averages, tracking the low and high extremes over a 10 week (essentially quarterly) period:
Since the 10 week high moving average closed below the 200 day MA in late November 2014, WOW stock price has fallen 35%! Momentum matters. A more aggressive setting would be to first reduce risk when the weekly price falls below the 200 day MA and the 10 week low MA.
And heres Dick Smith Holdings (DHS) with the same settings – a false warning was given in June 2014 (note though using the 10 week low MA would’ve had you avoiding the stock altogether) – but another warning in mid August led to the broad “down the elevator shaft” selloff thereafter.
While its true that using a moving average will result in a lag in the actual signal, its better than just holding and hoping for a recovery.