The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Oct. 27, 1997)

Scroll to the bottom for year-to-date Growth and Value Screen results.

Despite today's big market sell-off, we have an example of a couple of points about investing with growth stocks today. If you haven't heard by now, OXFORD HEALTH PLANS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OXHP)") else Response.Write("(Nasdaq: OXHP)") end if %> announced that it expects to report a quarterly loss this time around. As a result, the stock was murdered, losing more than half its value just today.

I don't intend to argue for or against the merits of holding Oxford here; I haven't done any research on it. But I want to use it as an example of how a stock, even a stock that has had some success, can be vulnerable to extremely fast moves. What can you do about it?

Many investors would offer up sell stops as a possibility. These are orders you place to sell your stock if and when it trades below your limit price. But as our research group showed in their study earlier this year, stops are likely to cost more than they save because of whipsaws -- getting kicked out of a stock in a quick correction, only to see it shoot right back up after you've sold out.

But even in a case of a huge loss like Oxford experienced today, stops wouldn't have protected you. The stock closed at $68 3/4 on Friday, but it opened this morning at $38 3/8. So before a stop loss could even have been effected, you'd have sustained a loss of 44%. Your sell stop order would have been executed there. The problem with stops is that too many investors believe they're guaranteed safety nets, but as you can see today, your stop price won't help you if the stock plunges overnight and never trades at your stop price. It only takes effect the first time the stock trades below your limit. That can be an eighth of a point or forty points; the stop kicks in the first time it trades below.

Granted, your stop would have saved you the loss of another ten points in today's trading, but that's probably less related to the news for Oxford as it is to the overall market plunge today.

The other problem this drop points out is the danger of a concentrated portfolio. If you're only holding five stocks, for example, today's drop in Oxford Health Plans cost your overall portfolio 10% (half of a position worth 20% of your total). If the stock were just one of fifteen, though, your loss as a result of the 50% haircut today would have only been 3.33%, not an amount you're likely to lose sleep over.

So what's the point? Skip sell stops in favor of a diversified group of stocks. Put together a couple of proven strategies to flesh out at least ten stocks, if not fifteen or even twenty if the commissions are reasonable for the size of your portfolio. Don't let the wild fluctuations of a single stock sink all your gains in the blink of a stock quote at the opening bell.

Oxford Health, incidentally, was an Unemotional Growth choice early in 1997. But as earnings began to slide in relative terms in recent months, it was replaced in the portfolio. Now whether this is a representative example of the UG model's ability to shift out of a troublesome stock before the fury breaks loose is still open to debate, but it's an interesting example to have watched this year. (Little comfort, though, given UG's weak 1997 gain.)

I'm sure we'll use today's events for Oxford as an example of what can happen for many months to come. It'll join the ranks of "the Rise and Fall of Micron Technology" in my quiver of teaching arrows. Hang in there Fools and protect yourself against days like today so that when they come, your long-term strategies aren't shaken to their roots.

Monthly Growth Screens
(Jan. 3 to present)
69.50%  Relative Strength  
22.32%  Investing for Growth  
17.78%  EPS Plus RS  
17.24%  S&P 500 Index  
10.09%  Low Price/Sales  
  8.93%  Formula 90  
  8.28%  YPEG Potential  
  3.03%  Unemotional Growth  

Annual Value Screens
(Jan. 1 to present)
17.22%  Dow Combo  
17.04%  Unemotional Value  
17.04%  Beating the Dow  
15.57%  Beating the S&P  
15.42%  Foolish Four
14.81%  Dogs of the Dow  
11.06%  Dow Jones Ind Avg