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.
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 aroundThis 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:
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
- 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.
- Stop your losses. If I buy Apple (AAPL - Get Report) 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.