Cutting your losses quickly will set you free, to paraphrase Keith McCullough, founder and CEO of Hedgeye Risk Management.
But it’s a hard lesson to learn.
I’m mostly well-positioned for the current economic and market environment with an ample supply of U.S. dollars, U.S. treasuries, and gold.
But I still have some losers hanging around my personal account such as Playboy, which I’ve sold some of but not all, because I refused to recognize that the market currents had changed.
Instead of taking a 10 or 15 per cent loss, I stubbornly turned that into a 50 per cent loss.
Jesse Felder, Founder, Editor & Publisher of The Felder Report, gives a recent example based on Russian stocks to explain why it’s so crucial for investors to dump their losers quickly.
by Jesse Felder, The Felder Report
“The only thing to do when a person is wrong is to be right, by ceasing to be wrong. Cut your losses quickly, without hesitation. Don’t waste time.” -Jesse Livermore, Reminiscences of a Stock Operator
When the Russian stock market crashed last week, I was intrigued. Panic in the markets never fails to grab my attention.
At less than three-times earnings, there also appeared to be an adequate margin of safety in many Russian commodity-producers so I took at stab at it.
However, after putting the trade on, I was never able to get comfortable with it as an actual holding and so I got right out.
Of course, buying into panic is never comfortable but at least you can have faith in the idea that there is some level of intrinsic value that provides a floor for potential losses.
Buying Apple in the wake of Steve Jobs’ passing or Herbalife as Bill Ackman was pursuing an all-out short assault was uncomfortable but that faith in an intrinsic floor for prices was there.
I just didn’t have that same sort of faith in buying Russian stocks today.
The point I’m trying to make is that we all make mistakes. I have made many over the course of my career. But I’ve learned, through difficult experience, to take the loss and move on.
Study any of the greatest investors and traders in the world and, while they all have very different ways of making money in the markets, they all have one thing in common: they are very good at taking losses.
With all of the newbie traders that have come into the markets in the past couple of years, drawn to the idea of reaping huge profits in meme stonks, YOLO call options, NFTs and cryptos, this is a lesson that will likely be learned the hard way.
But if you’re serious about becoming a real trader or investor, make it your mission to become great at taking losses and the profits will take care of themselves.
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Related stories: The Courage to Act on Major Commodities Bull Market – A prescient article by Felder from December of 2020 when West Texas Intermediate oil traded around $61 per barrel versus about $109 today.