Focus on controlling losses

In trading, it’s very important to anticipate what will happen, and avoid even thinking about what should happen. Even if you can’t help thinking about what should happen, and are seduced into action by the thought, at least have the humility to reverse your action when the market says that you are wrong. And, remember, being too early is just another way of being wrong. It can take the market a long time to start to act rationally.

It finally occurred to me that maybe studying losses was more important than searching for some Holy Grail to making money. So I started reading through all the material on the pros again and noted what they had to say about losses.

• My basic advice is don’t lose money. (Jim Rogers)
• I’m more concerned about controlling the downside. Learn to take the losses. The most important thing in making money is not letting your losses get out of hand. (Marty Schwartz)
• I’m always thinking about losing money as opposed to making money. Don’t focus on making money; focus on protecting what you have. (Paul Tudor Jones)
• One investor’s two rules of investing: Never lose money. Never forget rule #1. (Warren Buffett)
• The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly. (William O’Neil)
• Learn how to take losses quickly and cleanly. Don’t expect to be right all the time. If you have a mistake, cut your loss as quickly as possible. (Bernard Baruch)

The pros could all make money in contradictory ways because they all knew how to control their losses. While one person’s method was making money, another person with an opposite approach would be losing — if the second person was in the market. And that’s just it; the second person wouldn’t be in the market. He’d be on the sidelines with a nominal loss. The pros consider it their primary responsibility not to lose money.

Learning how not to lose money is more important than learning how to make money.

NB this borrows liberally from Max Nova’s Review of Jim Paul’s book.