I Win By Losing

WinnerI spent several years of my life writing software for hedge funds, and one of the most interesting things I learned was that some of the most profitable trading strategies actually lose money on more than 60% of their trades. The managers pick losers far more often than they pick winners, but still make a lot of money.

They pull this off by being extremely disciplined about selling a position that is going bad and staying in or adding to those that are  turning out well. Also, it turns out that performance can almost never be improved by trying to make fewer mistakes upfront by trying to pick fewer losers. Such efforts usually lower returns. Performance is improved by fine tuning how much money to invest and learning how to identify bad trades sooner.

The winners are not the master stock-pickers, but the master risk-managers.

Entrepreneurs could learn a lot from this. Put your ego aside and don’t worry about being “right.” The key to success is figuring out a way to test a new product or sales channel without putting too much time or money at risk, and having the disciple to cut your losses quickly if your idea does not work as expected. Then, it’s time to try another low-cost, low-risk approach.

I find it comforting to know that you can be a big winner by being wrong most of the time.

Post Navigation