Editor's note: What's your goal in investing? If your answer is "always make money" or "never be wrong," well... you're bound to be disappointed. In today's essay – originally published in 2017 – Steve talks about the most reliable way to make money as an investor...
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, thinking about your typical habits... 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
Editor's note: When the Melt Down finally comes, it won't feel like a top. That's why you need a plan... And thanks to our friends at TradeStops, it's easier than ever to cut your losers short, get the most out of your winners, and protect your gains as we approach the last leg of the Melt Up. Click here for more details.
Further Reading
"We don't need to know the script in order to make good trading decisions," Ben Morris says. Stocks have done well in 2019. But when volatility strikes, these strategies will help you stay on course... Read more here.
"In about 10 years, you'll think it's the best decision you've ever made," Porter Stansberry writes. As he explains, three crucial steps can boost your portfolio's performance this year – and every year. Learn more here: The Best, Safest, and Surest Way to Get Rich in Stocks.
If you follow this advice today, you'll never lose another night's sleep worrying about which way your investments will go tomorrow...
THIS PAYMENTS GIANT SHOWS CONSUMERS ARE WORRY-FREE TODAY
Today, we're looking at one of our favorite gauges of economic strength...
Consumer spending makes up more than two-thirds of the economy. So, when consumer confidence is high and people are spending freely, it's a sign the economy is still going strong. One way to see this is by looking at credit- and debit-card transactions. And today's company benefits from every swipe...
Visa (V) is a $405 billion payment-processing giant. The company collects a small fee every time one of its debit or credit cards makes a purchase. It competes with companies like Mastercard (MA) and American Express (AXP). But Visa is far and away the leader in the space – it controls more than 50% of the payment-processing market by purchase volume. And in its 2019 fiscal year, Visa reported sales of $23 billion, up 11% from the year before.
As you can see in today's chart, Visa's shares are surging higher. The stock is up around 140% over the past three years, recently hitting a fresh all-time high. It's more proof the everyday consumer is thriving today...
