Have you heard the phrase: ‘A long-term investment is a short-term trade gone wrong!’? It refers to many people’s natural tendency to hold on to an initially poorly performing trade in the hope that it eventually recovers; thus promoting it unadvisedly from a speculative “trade” to a serious “investment”.
When it comes to winners, novice traders tend to do the opposite: they bank their profits quickly, because it feels nicer to bank a profit than to crystallize a “paper” loss. Some successful traders do this too, but this unfortunate fact doesn’t help me to make my point 😉
The end result is that you end up with a portfolio of losers which never recover, while the winners that you let go prematurely just keep on winning.
Key Points to Consider
1. Human Psychology in Trading
The phrase “A long-term investment is a short-term trade gone wrong!” highlights the psychological pitfalls of holding onto losing trades due to the fear of crystallizing losses. This emotional decision-making often overshadows rational analysis.
2. Winners vs. Losers: Inverse Behaviour
Novice traders tend to cut their winners too soon for immediate gratification, while holding on to losers in the hope of recovery. This creates a portfolio skewed toward underperforming assets and missed opportunities.
3. The Power of Letting Go
Much like pruning a garden, letting go of dead weight is essential for overall growth. Holding onto losers consumes mental energy and capital that could be better spent nurturing winners.
4. The “Run Your Winners” Strategy
Stocks with upward momentum often continue rising. The advice to hold rising stocks and protect profits with stop orders is a practical strategy to capitalize on growth trends.
5. The Discipline of Cutting Losses
While you can’t control how much profit you’ll make, you can control how much loss you’ll take. Cutting losses early preserves both capital and mental energy, enabling traders to focus on new opportunities.
6. The Shift in Perspective
“A long-term investment is a short-term trade gone good” shifts the focus to flexibility. Treat every position as a short-term trade, but let winners graduate to long-term investments organically.
7. Strategic Pyramiding
Adding to winning positions, known as pyramiding, is a proactive approach to capitalizing on trends. This combines confidence in the trade with disciplined risk management.
8. Realism and Risk Control
Accept that you can’t predict the size of your profits but can limit your losses. This realism keeps trading grounded and focused on what is within your control.
9. Lessons Beyond Trading
The principle of focusing on winners extends beyond trading. Whether it’s time, energy, or resources, doubling down on strengths while discarding weak efforts is a universal strategy for success.
An Analogy
When not trading or writing articles, I publish books and e-books. When I see that some of my publications are selling well while others aren’t, I turn my marketing efforts to the ones that need the most help, right? Wrong! I’ve found the best approach to be to plug the best sellers more and more as they keep on selling, and to let the “dead wood” publications fall by the wayside. And so it is with stocks.
Trading is also like gardening. Imagine you plant several seeds—some sprout into strong, thriving plants, while others struggle and wilt. A novice gardener might keep watering the weak plants, hoping they’ll recover, while neglecting the flourishing ones. An experienced gardener knows to pull out the struggling plants to make room for the healthy ones to grow even stronger. Similarly, in trading, you should “pull the weeds” (cut your losses) and “nurture the blooms” (let your winners run). Your portfolio, like a well-tended garden, will thrive when you focus on what’s growing rather than clinging to what’s dying.
Run Your Winners; Cut Your Losses
When a stock price is heading higher and higher, it’s best to keep on holding and maybe even pyramid while protecting some of the accumulated profit with a stop order. A rising stock will most likely (but not definitely) keep on rising, and the sky is the limit.
When a stock price is going lower, it’s best to cut your loss until such time as you might be able to buy even lower. By doing so, you free up your capital for better opportunities.
While you can’t control how much profit you will make (you just have to try and hang on in there), you can control how much loss you take!
The Short Term Trade Gone Good
My philosophy is to treat every new position as a short-term trade, with a view to getting out quickly for a small loss if it goes the wrong way. He who trades and runs away lives to trade another day.
If my short term trade goes the right way, I’ll hang on to it for as long as I possibly can… thereby promoting it from a “trade” to an “investment”. So for me:
“A Long Term Investment is a Short Term Trade Gone Good!”
