I answered someone’s question about using stop losses yesterday, and indicated that I rarely use anything as mechanical as a sell stop in my investing — and today I was stopped out of my position in Agrium (AGU), so I thought I’d repeat what I said there:

“I rarely start a position with a stop loss in place — I will sometimes use a stop loss with a stock that is rising and that I think is worth a gamble but that I don’t know well, something that I take on as a small speculation. I know that a great many investors will use stop losses to cull losers from their portfolio, but I generally need a reason to sell other than “the price has gone down” — that’s usually because most of my larger holdings are in place because I think the company is a good long-term value proposition, or a good dividend compounder, so unless my opinion of the company changes a lower price just means it’s a better value.

“I would have been stopped out of Apple with a 25% stop loss earlier this year if I held to such a firm strategy, which might have worked out in the short term … but then I would have had to be active and prescient enough to sell at $500 and buy back in when Apple hit $400. Trading in and out actively is not my game, and it’s not something I’m very good ad — it requires you to be right too often, and too precisely, and too often I think it leads to selling stocks just when they look like good buys. Stop losses would have saved me losses in some stocks, particularly in some of the more volatile small cap speculations I’ve dabbled in over the years, so I think they may have some value with smaller and more speculative positions (though they’d have to be looser than 25% in most of those cases) … but a firm rule would also have taken me out of some very strong long-term positions like Rayonier, Markel, Berkshire Hathaway and Google just at the point that I should instead have been buying more. The better I know a company, the less I want to use a stop loss to make mechanical decisions for me.

“I will sometimes use a stop loss as a selling tool — ...