The Big Picture for the Week of May 1, 2005

Did you see Cashin’ In this week? I was very confused by Wayne’s ordeal with a company called Diamond Cluster (DTPI). According to the Fox News site Wayne bought the stock in January at $17.10. DTPI had some bad news that caused the stock to open Thursday at $13.29 after closing at $14.30 the day before. A big deal was made on the show about a miscommunication between Wayne and the producers that fouled up his intentions for a stop order for the challenge. The Fox site shows he sold at $11.90 on Thursday but for his own account his stop order allowed him to sell much higher but no specific numbers were given.

My confusion is over how Wayne places stop orders. He said on the show, for his account, he was stopped out on Thursday. That probably means he was taken out at the open, $13.29, when the stock gapped down at the open. According to Yahoo finance the lowest the stock ever got before Thursday was $14.09 on April 21 so we know his stop price was below that level but we don’t know where so for the sake of discussion lets say it was $14.08, one penny below the low since he bought it. That is $3.02 below where he bought it or 17.6%.

I don’t place a lot of stop orders but does placing one 17% below where you bought a stock make sense? Is that something people do? I am not being a wise guy. I usually only use stops after a stock has run up and I want to preserve a gain (I say usually but in fact I don’t recall ever putting in a stop order right away but maybe I did and I forget?).

As I look at Wayne’s holdings in the challenge I see he also own Tessera Tech (TSRA) which he bought on March 31 at $43.50. It closed Friday at $26.57. I know it had very bad news but I don’t recall exactly when. But that stock is down 38.9% since he bought it and he has not been stopped out?

Let me be perfectly clear, I am not doubting anyone’s veracity. I am under the impression from watching the show that Wayne uses stop orders on anything he has bought in the last few years. I may have the specifics wrong about how he uses stop orders but he talks about them all the time on the show.

Based, again, on the Fox News site he has not been stopped out on TSRA. Does anyone know what his philosophy or method is?

I have written many times that I am not a huge fan of stop orders. They are very problematic. You can get stopped out at the low, chase it back up and buy at a high, end up in a substitute that is an inferior company and so on. The point being they are not the be all end all to every trade.

Chances are that if you have a diversified portfolio you have some stocks that are down a lot right now, that is only logical. I have reduced stock exposure by selling some high beta names which has been my plan all along. We’ll see how good my strategy was in a few months but right now I don’t want to sell out too much of the portfolio.

So I guess the conclusion is I’d like Wayne to tell us what his strategy with stop orders is. Is it me, do I have this upside down?

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