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How to use stop losses. Should you? Never buy stocks on margin. Here’s why.

Years ago, I did an extensive study. If your stock falls 15% from where you bought it, you should sell it.

Some stocks will bounce back and go back and above what you paid. But, on average, you’re better off sticking to this inviolate rule.

If your stock falls 15%, but is still above what you paid for it, you need to figure out: Is this a long-term problem or a short term problem?

Remember recently, I said dump BABA (Alibaba) and all Chinese stocks. My blog was titled

How two Chinese companies illustrate my core investing principles. Today’s key takeaway: Sell your Alibaba (BABA) shares instantly, if not sooner. Click here.

Since then all the leading Chinese stocks have fallen. BABA is down 16%.

Grow older. Figure what you understand and what you don’t.

I long ago figured pharma and biotech are “too hard.” I’m not in the industry. I don’t devour the medical literature. Item:

Cramer and others have been pounding the table for a company call Emergent Biosolutions (EBS). It’s the picks and shovels of the pharma biz. And it tells a great story. But it screws up big-time. Search “Emergent” at the NYTimes web site and you get these horrible stories:

Never buy stocks on margin

Every major post-war financial crisis has been caused by too much borrowing.

Borrowing money is designed to juice your investment returns. Borrow $80 on a $100 stock, which goes to $120. Bingo your return is not a miserable 20%, it’s a handsome 75% (assuming you paid $5 interest on the $80). If your $100 stock falls to say $70, you ‘ve lost your $100 and owe your bank $10. That’s a sure way to go broke.

Yesterday I wrote about the desperate, greedy morons in the banking industry who got taken big-time by a Archegos Capital Management, a family office capital management firm run by Bill Hwang. This stuff fascinates me,  Here’s the beginning of Wikipedia’s entry on Archegos:

On 26 March 2021, Archegos defaulted on margin calls from several global investment banks, including Credit Suisse and Nomura Holdings, as well as Goldman Sachs and Morgan Stanley.[5][6] The fund had large, concentrated positions in ViacomCBSBaidu, and other companies,[7] and the firm’s use of total return swaps had helped to hide its high exposure from lending banks. Its derivative contracts “exposed the firm to severe losses when the trades went bad.” The Wall Street Journal reported that Hwang lost $8 billion in ten days.

Here’s an earlier one on over-borrowing from 1998 (also from Wikipedia):

Long-Term Capital Management L.P. (LTCM) was a hedge fund[1] based in GreenwichConnecticut that used absolute return trading strategies combined with high financial leverage. LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM’s board of directors included Myron S. Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences for a “new method to determine the value of derivatives“.[2]

Initially successful with annualized return of over 21% (after fees) in its first year, 43% in the second year and 41% in the third year, in 1998 it lost $4.6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and 1998 Russian financial crisis.[3] The master hedge fund, Long-Term Capital Portfolio L.P., collapsed in the late 1990s, leading to an agreement on September 23, 1998, among 14 financial institutions,[4] which included; Bankers TrustBarclaysChase Manhattan BankCrédit AgricoleCredit Suisse First BostonDeutsche BankGoldman SachsJP MorganMerrill LynchMorgan StanleyParibasSalomon Smith BarneySociété Générale, and UBS, for a $3.6 billion recapitalization under the supervision of the Federal Reserve. The fund liquidated and dissolved in early 2000.[5]

Now go to Wikipedia’s entry for the Financial crisis of 2007–2008

The financial crisis of 2007–2008, also known as the global financial crisis (GFC), was a severe worldwide financial crisis. Excessive risk-taking by banks,[1] combined with the bursting of the United States housing bubble, caused the values of securities tied to U.S. real estate to plummet and damaged financial institutions globally;[2] this culminated with the bankruptcy of Lehman Brothers on September 15, 2008, and an international banking crisis.[3]

I don’t have a mortgage. I don’t buy stocks on margin. I don’t owe anyone anything. And that’s the way I like it.

Skills for entrepreneurs

Tell your kids to learn:

+ Selling. There are plenty of books. One I like is “Active Listening.” Click here.

+ Marketing, including social media marketing. All the biggies — from Facebook to YouTube — have endless marketing materials on their web sites.

+ Web site construction. You don’t need to be web whiz. But you need to know how sites and the web work. What’s a good site. And what’s a bad site. Learn HTML. It’s easy.

+ Excel. It’s still useful

+ Learn what the cloud can do for you. Spend some time on aws.amazon.com.

Canadian burial

As a bagpiper, I play many gigs. Recently I was asked by a funeral director to play at a graveside service for a homeless man. He had no family or friends, so the service was to be at a pauper’s cemetery in the Nova Scotia back country.

I was not familiar with the backwoods, I got lost.

I finally arrived an hour late and saw the funeral guy had evidently gone and the hearse was nowhere in sight.

There were only the diggers and crew left and they were eating lunch. I felt badly and apologized to the men for being late.

I went to the side of the grave and looked down and the vault lid was already in place. I didn’t know what else to do, so I started to play.

The workers put down their lunches and began to gather around. I played out my heart and soul for this man with no family and friends. I played like I’ve never played before for this homeless man.

And as I played “Amazing Grace”, the workers began to weep. They wept, I wept, we all wept together. When I finished, I packed up my bagpipes and started for my car. Though my head was hung low, my heart was full.

As I opened the door to my car, I heard one of the workers say, “I have never seen anything like that before, and I’ve been putting in septic tanks for twenty years.”

Fun cartoons

Deer don’t like daffodils. They’re sort of toxic. Daffodils contain the alkaloid lycorine which makes them unpalatable to deer and rodents.

See you soon. — Harry Newton