Be a Good Loser
I’m a big fat loser — and I hope you’re one too…
There’s nothing more important to investing success than being a good loser. Nothing.
It’s natural to be focused on winning investments, but it’s the sign of a novice. The fact is that winning is easy — it’s losing, and losing well, that’s hard. Crazy as it sounds, if you can master the art of being a loser, you’ll be able to stuff more cash in your portfolio than you ever thought possible.
I know that sounds contrary to popular opinion. Some guy named Warren Buffett once said, “The first rule of investing is don’t lose money; the second rule is don’t forget Rule No. 1.”
But even for Buffett, or any other fundamental investor, that’s hard advice to follow. No investor I know would lose money if they could avoid it. So people try to ignore their losses. They pretend that they never happened.
If you hate losing, though, you’ve got to be good at it. You have to understand why you lost — and how to minimize or avoid it next time. You’ve got to be a good loser.
So what’s the difference between a “good loss” and a “bad loss”? The decision matrix below from the book Winning Decisions does a good job of explaining it:
Here’s the key: Good losses should be built into any good trading system. That way, no matter what happens in the short term, you can follow the trading rules and “trade your plan.”
Sometimes, market conditions will hand you a cold streak. The key is to look at trades systematically, not individually. With a good trading system that focuses on high-probability trades (like my STORM System), you should end up profitable over the longer term. But minimizing losses mechanically ensures that you’ll survive in the markets long enough to see that profitability at the end of the day.
A Real-World Example
To show you what I mean, I’m pulling out a real-world example that my STORM Signals readers just unloaded. I know plenty of investment newsletter writers who will tout their winners, but I haven’t seen any willing to talk about a losing trade like I’m about to — that’s just how important being a good loser is to me.
The stock in question is Boulder Brands (NASDAQ:BDBD). Shares broke out back in mid-December, but the move was really a bull trap, and shares sunk back down into their trading range for the next month and change. When we took a position in BDBD, we recommended setting a stop loss at the 50-day moving average, then just under $12. When shares broke down through that stop loss level, we recommended selling.
It all looked something like this:
We saw $12 as an important level — a price at which there’d previously been a glut of buyers willing to jump in and pick up shares cheaply. When BDBD printed below that price, we had a major red flag that those buyers were nowhere to be found. If that’s not a sell signal, I don’t know what is.
Make no mistake: It sucks to lose. I’ve never bought a stock — or recommended buying one — that I thought would fall lower. But, by knowing when to throw in the towel, we avoided the next week of trading, when shares of BDBD absolutely collapsed. There’s a reason why it makes sense to base stop loss levels on important technical prices; Boulder Brands is a perfect example of that.
Our buy in BDBD came from good investment process, and just as importantly, our sell decision came from that same good process. Both trading decisions were mechanical. We didn’t have to stop and think about how we felt about the company or what catalysts might impact shares a year or two from now. Shares broke support, and we sold.
By being good losers in BDBD, we walked away with more than 90% of our initial investment, while the bad losers got shellacked. That gives us a chance to be good winners on the next trade.
Apply that same cold mechanical process to your own trades and you’ll enjoy similar staying power in the markets.
Jonas Elmerraji, CMT
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