DO YOU KNOW?
If You’re a Good Loser
In our Do or Did You Know? blogs we provide readers with useful information that generally is not realized by inexperienced investors. In Chapter 6 of our publication, When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), we discuss the important concept of Risk Management.
Though Risk Management is a very important part of any investment or trading strategy, no individual or system is 100% perfect. All accounts, whether self-managed, overseen by a fund manager, or established in an algorithmic program, will occur losses regardless of success percentage. A sound, strictly followed, Risk Management system is designed to produce smaller losses, to protect capital over the long term.
The following is an old adage in the financial world, coined by legendary investor Warren Buffet, which states there are two rules to investing – Rule #1 “Don’t lose Money”, Rule #2 “Never Forget Rule #1.” The idea behind this statement is for one to focus on long-term capital preservation rather than chasing the higher risk short-term gains. Since equities markets can be very volatile short-term, the key points of this belief are that one should avoid significant risk, have a long-term mindset, maintain a “margin of safety” to protect against downturns, and keep cash reserves for bear market opportunities.
However, regardless of how well an account is managed, and how low risk an approach may be, periodic losses are inevitable. How well these losses are handled is the key to success.
The first step in identifying if you are a “good loser” is to measure one’s emotional response to such a loss. Individuals who become highly charged and upset are vulnerable to incurring more (or larger) losses than a calm, disciplined trader/investor. High emotion causes rash decisions, which can include closing a position too soon, or too late. There are varying “types” of investors/traders, and it is important to determine which you are prior to directing your own portfolio.
A “gambler” mentality is one that is very dangerous, as it incites high emotions with every fluctuation in price. These individuals tend to risk more then they should, as they are looking for the “big score.” They generally do not follow any risk-to-reward structure, and thus hold onto trades too long, often ending up with larger losses than necessary. They often follow “hot” tips, or trade small cap, or even penny, stocks with the idea there is a better chance to win big. Many will then become very upset, which equates to a BAD LOSER.
Another type of trader or investor, who may be less emotional, is one with a “can’t lose” mentality. This individual, despite having rules and a structured system, will break their own pre-determined parameters to avoid a loss. This type is the most common, and even those who can put emotion aside tend to suffer more losses than necessary. They generally make their worst decisions at the point where they may have set a stop-loss that has been hit (remember to keep mental and NOT in the public system), but then do not close the trade in hopes of a recovery. Losses often become larger (more often than not) as price generally tends to continue in the same direction. Though it is the desired goal to be successful on every trade or investment, it is not realistic. Keeping losses small is an essential part of any successful plan, and avoids the need to constantly play “catch-up.” This individual will then tend to blame the loss on bad luck or the market being “against them,” also equating to a BAD LOSER.
The most consistently successful trader/investor is one with a “disciplined” mentality, that strictly follows their parameters, is free of emotion, and accepts small losses as part of the process. This type of individual studies the market, develops a trading plan/strategy, and sticks to it on every trade. They do not allow interference, or the desire to win, to cloud their judgment, and close positions when the market dictates, not when they are satisfied with a monetary amount. Their risk management plan is designed to incur small losses, while letting winning trades run, until trouble is detected. This individual will also journal every trade to determine what went right, or wrong, and attempt to repeat the successful formula. Understanding that losing trades will occur, and are sometimes out of your control, symbolizes a GOOD LOSER.
To summarize, being or becoming a “good loser” can be very beneficial to your overall success as an investor or trader. The more you are willing to accept small losses, which does not necessarily mean you were “wrong,” the better your risk management structure will be followed. Every trader who ever lived has incurred losses now and again, and keeping those drawdowns small will increase the profit factor in the long run. Steering clear of revenge trading and emotional moves are a key. Becoming familiar with charts, expected price moves, volatility ranges of an asset, and flexibility (not stubbornness) will highly improve your trading experience.
*** This information is not intended to be financial advice, and should be considered or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of the financial markets.
