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The Best of Kass

Stocks in this article: AAPL

Meanwhile, stick to your investment/trading knitting, and don't drift in style.

At the time of publication, Kass had no positions in securities mentioned.

Defense Drill
Originally published on Thursday, Feb. 21 at 10:49 a.m. EST.

  • Remember: It's not your batting average that counts in investing and trading; it's your defense.

Back about a week ago, on Feb. 13, I wrote a column entitled "Practice Your Defense" in which I highlighted that "the real key to delivering good investment and trading returns is not your offensive ability and swinging for a high batting average; it is importantly about your defense on the field."

This is a very important message and has been the principal subject in the comments section this morning.

It is such a valuable survival technique and means for delivering superior investment returns -- that I wanted to repeat the post in its entirety:

When we met in nineteen thirty-eight, it was November When I said that I would be his mate, it was December I reasoned he would be the greatest husband that a girl had ever found That's what I reasoned That's what I reasoned Then April rolled around
Strike three, ball four, walk a run'll tie the score Yer blind, Ump, Yer blind, Ump, Ya mus' be out-a yer mind, Ump!
-- Richard Adler and Jerry Ross. "Six Months out of Every Year," Damn Yankees

This week pitchers and catchers report, as baseball's spring training gets into swing this month.

As I have repeatedly written over the years, the real key to delivering good investment and trading returns is not your offensive ability and swinging for a high batting average; it is importantly about your defense on the field.

Let me explain.

A high batting average and an impressive display at the plate (measured by the number of stocks that rise in your portfolio as measured against your total positions taken) is important, but it is not as significant as many think.

The key to delivering returns is defense, controlling your risk by stopping your losses and, when you are up at the plate, letting your profits run.

When I mention a buy or a short on my diary, it is almost as important as how I manage the position as the actual performance of the stock.

Below are the two basic tenets that provide the foundation to good investment returns:

  1. Let it ride. If I buy Altisource Portfolio Solutions (ASPS) at $17 a share in late 2009/early 2010 and let it run to over $100 a share, it has an outsized positive impact on my returns. But only if I let it run.
  2. Stop your losses. If I buy Apple (AAPL) at $625 a share and stop my loss at $605 and don't let the loss expand on the stock's way to $450 a share, this is also a win. I have exhibited discipline, and I have contained my losses.

Now let's try an exercise.

Go over your profit and loss for your 2012 stock trades and investments. Now figure out an attribution of your returns by gains and losses. If your gains are large (no matter how few there are) and your losses (no matter how many there are) are small, you are successfully controlling your portfolio's risk and likely achieving good investment returns.

Please consider this in the future when I discuss that I am buying a stock that fails to appreciate or short an equity that rises in my face.

At the time of publication, Kass had no positions in stocks mentioned.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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