Investors can limit their losses on a falling stock position by putting in an order to sell a specific stock when the price falls to a predetermined level. On the surface, this makes a lot of sense. Unfortunately, using a stop-loss order can also cause investors to miss out on future gains. On this clip from Motley Fool Live recorded on Dec. 18, 2020, "The Wrap" host Jason Hall and Fool.com contributors Danny Vena and Asit Sharma discussed the pitfalls of the stop-loss strategy. 10 stocks we like better than The Trade DeskWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.* David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and The Trade Desk wasn't one of them! That's right -- they think these 10 stocks are even better buys. See the 10 stocks *Stock Advisor returns as of November 20, 2020 Jason Hall: Cody's asking one I think we should all address here. Cody said, "So why don't you use stops to get out of your loser stocks, like have a 20% stop-loss set?" I'm going to answer this real quick and I'll let you guys chime in. Because stop-losses stop you out of great stocks. It's that simple. Great stocks fall, and then they recover. A lot of times they fall for no other reason than maybe earnings didn't meet somebody else's expectations or somebody on the conference call said something about their guidance, and people sold and the stock fell. Or maybe some analysts changed their outlook and lowered their price, and the price fell, and materially the business didn't change, and then you get stopped out. Here's the biggest problem is that emotionally, here's what happens. It falls and you have a stop-loss set that stops you and sells you out of that stock once it hits that limit. Then you see it happens. Maybe the next day you log in your portfolio or maybe it's a week before you even know that it happened. Something happening around vacation. You didn't see the email, then you finally figure out what's happened, and the stocks already recovered. It's back above where it was where you sold, and then you anchor on the price that you sold that and you say, "Well, I'm going to wait. It's going to fall again, and I'll just wait and buyback again," and then it goes up another 10%, and then it goes up another. A year later, the business has done well and it's done everything you expect it to do, and you've sat on the sidelines because you told your broker to stop you out of the stock over a short-term thing. That's why I don't do it because my goal is not based on that. My goal is 10 years, 20 years. My kid going to college. I'm retiring. All those stuff I'm going to pay for down the road, that's what I'm investing for. I can't let the short-term volatility cause me to take the eye off the ball. Guys, what are you want to add to that? Asit Sharma: Yeah. Stop-loss, it can be a great mechanism if you are a trader and if you are running a risk-adjusted scenario that I have this much in the kitty this year and I'm going to protect my capital, and I'm just going to build it in short spurts. Basically, I'm going to become a trader or swing trader. The reason that I say that and you may have object and say, "Well, I'm not. I'm actually an investor. I'm an investor who wants to use the stop-loss." But I'll posit that the greater the stock and the greater the opportunity, the higher the probability that you are going to bust through any stop-loss that you can imagine. If I sound cocky by saying that, it's not cockiness. I'm telling this from hard experience. You can set it to 20% stop-loss and a really good stock is going to bust through that. Why is this? It's because the stocks with highest potential everyone wants to chase, and there are fewer shares available whenever one's buying them up. What goes on with that stock? When there's more demand in the marketplace, there is more uncertainty because then people start second-guessing themselves. So the stock becomes more volatile. The better the stock, the better the potential, the higher the volatility. This has happened to Apple (NASDAQ: AAPL). This has happened to Microsoft (NASDAQ: MSFT). Name any really stable company today. You go back in time, this has happened to General Mills (NYSE: GIS) and it's 100 years ago, but [LAUGHTER] think about it. What does it mean? It means that if you're truly an investor going for the best stocks you can, there will be periods where you will get stopped out of a stock. Jason just wonderfully explained the psychology of trying to get back into a stock or work around stop-losses, it's impossible, it is well-nigh impossible to do. My best advice, just from a lot of battle scars, is try to avoid that. If your capital is such that you feel "I just can't risk my capital," then maybe look holistically, like how much do you really need to be in the stock market if "I can't take an appreciable loss in a really good stock?" Hopefully you're doing what we were talking about just a few months ago on Fool Live. I think we put out a list. Guys, I know we got pinned to read from this list about 15 do's and 15 don'ts, something like that. One of them was, don't just buy a stock, buy a handful of stocks or 15 stocks at least so you spread the risk around. Yeah. I'm so against stop-losses. But now if you're a trader or a swing trader, by all means, use it. It's a good tool. If you're an investor, just try to be ready in your mind to see that great stock go down 10%, 20%, sometimes more 30%, 40%. It happened this year with so many great stocks. Look where they are today. Yeah. I know I'm preaching to the choir here with you two, guys, but I'm curious if Danny has any other thoughts to that. Jason Hall: I have one thing I want to add before Danny does. I think this is important. If you follow the money of why stop-losses exists, they exists in the time that broker just charge money for trades. If they could build a tool, they would automatically create a trade and give them trading commissions. Then why would they not want to market that to people as a great way to improve their trading performance? That's why all these automatic trading mechanisms exists because brokers used to make a ton of money on them, not because they were better for investors. Danny, go ahead. Danny Vena: Jason explained it better than I could why I personally I'm against stop-losses and Asit added to a wonderfully. What I want to do is I want to give you a real-life example and show you what can happen. If you look at The Trade Desk (NASDAQ: TTD), which is one of my favorite examples of what happened this year. In January through, say, the middle toward the end of February, The Trade Desk was up about 20% for the year. Then from that period in mid-to-late February until about the 18th of March, the stock actually lost close to 60%, so two-thirds of its value. The year-to-date here was actually down 44%. Now, you look at that and think, well, that certainly would have triggered a stop-loss. In fact, somebody would have looked at that and then thought, "Oh my goodness, I just saved myself a ton of money." But let's look at what happened since then. I set this for the 18th of March, which happens to be the same date that I bought and added to my position of The Trade Desk, and look at what's happened since then. Like Jason was talking about, you might not be paying attention, you might not be going back and looking at the stock price every day. If you've got stopped out of a stock and saving you 20% of a couple of thousand dollars, maybe you saved yourself a few hundred dollars. But look at where the stock is today. It's up more than 500% just this few months later. It doesn't matter who you are as an investor, the majority of us would have missed that run up had we used a stop-loss. Jason Hall: A great quote from Peter Lynch, he said, "More money has been lost waiting for the next market correction than has been lost in the market corrections." I promise you that there are billions of dollars of missed gains by people that got stopped out of stocks in March. I guarantee that they expected the market to keep falling and then have seen it recover. So yeah, I think we've addressed that one in its full.Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Asit Sharma owns shares of Microsoft. Daniel Vena owns shares of Apple, Microsoft, and The Trade Desk. Jason Hall owns shares of The Trade Desk. The Motley Fool owns shares of and recommends Apple, Microsoft, and The Trade Desk. The Motley Fool has a disclosure policy.Source