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It's Time to Change Your Thinking About Making MoneyBy
Wednesday, February 8, 2017
I invest in a simple way...
I'm willing to concede a few battles to win the war.
This is a simple idea. Unfortunately, most investors can't do it. It goes against our egos to simply admit that we might be wrong and move on. We think we need to be right EVERY SINGLE time.
What's the war we're trying to win? Growing our net worth.
And to grow your net worth, you have to start by knowing that you are NOT going to win every time in investing. It's not going to happen...
You are going to win some, and you are going to lose some. Let me repeat that last part: You are going to lose some.
You need to be OK with this.
Knowing that you are going to lose some, you have a simple mission: You must take steps to make sure your winners are larger than your losers.
This is where nearly all investors fail. But that doesn't have to be you...
I turn it into a simple math problem... I make sure my losers stay small by cutting them early. And I let my winners grow.
It's the old saying... "Cut your losers and let your winners ride."
Let's take a quick look at some easy math so you can see how important this is...
Let's say you made three consecutive trades. By the time you closed out, the returns were: -10%, -10%, and +100%.
How did you do?
You might think that you did poorly... Your median return was -10%. That sounds terrible – no question.
Also, you were wrong 67% of the time. That sounds bad, right? Who wants to lose money on two out of three trades?
But I would take these three trades any day...
Here's what really happened: In this scenario, $100,000 invested would have turned into $162,000.
You would have made a 62% return on these three trades. And that holds true regardless of the order you placed them in...
$100,000 would have turned into $90,000 after the first losing trade, and then $81,000 after the second losing trade. Then it would have doubled to $162,000 after the winning trade.
Flipping the order around gives the same result: $100,000 would have turned into $200,000 on the first trade... Then it would have fallen to $180,000, and finished at $162,000.
How does turning $100,000 into $162,000 in three trades sound to you? It sounds pretty good to me!
All it takes is cutting your losers early and letting your winners ride. You made sure your losses stayed small... And you let your winner ride all the way to 100% gains.
So how do you trade? Do you cut your losers early and let your winners ride?
If not, then it's time for a change... You need to realize that it's OK to lose some battles on the way to winning the war.
Here's the thing... You will not be right every time. I promise. What matters is what you do when you are wrong.
What is your plan? Most people don't have one. And that will crush them, eventually.
If you don't have a plan, I suggest changing your thinking about making money. Set yourself up for sustained success. Start cutting those losers early... and letting those winners ride.
Good investing,
Steve
Further Reading:
"I would close out of stocks for quick 20%-30% gains... only to see shares rise tenfold in the following years," Teeka Tiwari writes. Learn how to recognize and hold on to potential "superstar stocks" in his essay: Follow These Two Rules to Hold on to Your Long-Term Winners.
"I never questioned my decision to sell, even though I only stopped out by pennies and the stock popped right back up," writes Richard Smith. By following this system, you can consistently improve your returns and invest without the fear of regret. Read more here: This Is the Single Biggest Threat to Your Investing Success.
Market Notes'HERE BE DRAGONS'... Ancient map-makers used to label dangerous areas with the phrase, "Here be dragons." Today's chart highlights where the "dragons" are today – the retail sector...
We last checked in on retail with apparel-industry giant VF Corporation (VFC). Over the past few weeks, more retailers have reported their quarterly earnings, and it's clear that VF Corp is not the only one struggling...
Yesterday, high-end retailer Michael Kors (KORS) opened nearly 13% lower after issuing weak guidance for this year. The company specializes in producing luxury handbags, watches, and clothing. But in its earnings report for the third quarter, it announced that same-store sales dropped more than 6%... And the company expects lower earnings this year than analysts predicted.
Shares are down nearly 40% from their March peak and are now trading at a new 52-week low. The retail sector is under pressure. And with some stocks falling nearly 13% in a single day, it's a dangerous place to be...
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