Losers Average Losers

I recently came across an article in Baron's that made me think about one of the oldest sayings on Wall Street, "Let your winners run and cut your losses quickly."

I don't remember who coined it but It's probably one of the first investing quotes that I came across over 15 years ago. It's a phrase that gets thrown around so often, some might call it a cliche.

It sounds so simple but most investors fail to do it, even professionals who manage billions of dollars.

From a recent article in Barron's:

The Ontario Teachers' Pension Plan, one of the largest pensions in the world, recently made some big changes in it's US traded stock investments.

It more than doubled its holdings of Blackberry (BB) stock and made large reductions in Walt Disney (DIS) and Starbucks (SBUX) in the fourth quarter.

The above should be taken in context and It's too soon to say how this allocation change will work out, but in my experience keeping my winning positions and letting the losers go, has been the correct decision the majority of the time.

Let's take a look at the performance of the above mentioned stocks over the last couple years.

However, letting your winners run and selling your losers is easier said than done. Why? Because of human nature and our emotional attachment to money.

It's safe to say that most people will admit that selling and realizing a profit feels good, while selling and taking a loss feels bad.

Most of the time investors sell too early because they want to experience the good feeling of taking a profit but they are scared to sell their loser because they don't want to realize or admit their loss. They hope that one day it will eventually turn around and start going up. 

Some investors go even further and add to their losing position, compounding their losses in event that the stock continues to move lower. 

I love this image of billionaire trading legend Paul Tudor Jones.

Here's more proof that holding on to a loser is a bad idea. This chart shows the percentage gain needed to get back to break-even.

The major indices continue to trade at or near all time highs while ignoring negative news and events such as the coronavirus. This doesn't mean you shouldn't be using this strength to take some profits, but you should also take a serious look at your losing positions because they will more than likely go even lower when the market corrects.

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