How to Lose to Win

We have been writing investment newsletters for the last five years. For the twenty-five years prior, I was a professional money manager.

My life consisted of thinking about the financial markets night and day every day and then figuring out how to make money for my investors. I spent little time thinking about how to EDUCATE my investors. My goal was to make them money…

When my partner Whitney Tilson approached me about joining our prior firm, Empire Financial Research, five years ago, one of the aspects that appealed to me the most was the opportunity to do more for our readers than make them money.

The idea of EMPOWERING our investors through education seemed to be a better use of my skills for the next thirty years.

The old proverb says, "If you give a man a fish, you feed him for a day. If you teach him how to fish, you feed him for a lifetime.”

We like to think that our job at HX Research is to teach our readers how to fish while feeding them delicious fish meals every week based on our ideas. The best of both worlds!

Because we are not originally from the world of journalism or newsletters, we are very comfortable sharing the work of other authors.

One of our favorites is Ben Carlson of Ritholtz Asset Management. He writes a fantastic blog called A Wealth of Common Sense. If you haven’t checked it out or subscribed, you should check it out here.

He recently published an excellent note with this great quote from tennis champion Roger Federer, taken from his commencement speech at Dartmouth University…

In tennis, perfection is impossible… In the 1,526 singles matches I played in my career, I won almost 80% of those matches… Now, I have a question for all of you… what percentage of the POINTS do you think I won in those matches?

Only 54%.

In other words, even top-ranked tennis players win barely more than half the points they play.

On average, you learn not to dwell on every shot when you lose every second point.

You teach yourself to think: OK, I double-faulted. It’s only a point.

OK, I came to the net, and I got passed again. It’s only a point.

Like Ben, I was floored by this quote and thinking about it.

Here is an all-time tennis champion many consider the GOAT (“Greatest of All Time"), and he points out that he lost almost half the time.

Ben has a fantastic note discussing this in the context of long-term trading. The perspective is eye-opening, and—again—we encourage you to read the note.

We had another group of insights.

The first insight we considered was the "slugging percentage.” 

This baseball statistic looks not just at how often a batter gets a hit (batting average) or how often they get on base (on-base percentage) but how many bases they get when they come up to bat.

Think about not how often you win but how MUCH you win when you do win.

Federer won only a bit more than half the time, but WHEN he won, he was well-timed, and that made him a champion. His “slugging percentage” – the value of the points he did win – was very high.

In stocks, this is a powerful concept.

Imagine you had a portfolio in which you won only 54% of the time. If you employed good risk management, though, you would limit your losses and let your winners run.

You would have an outstanding portfolio if you never lost more than -20% on your losers but had many big winners.

Federer doesn't talk about slugging percentages, but understanding the concept of this in investing is powerful. Limit your losses, and make sure your winners count!

The second insight was what he had to say about how to deal with losing.

This is an even more powerful insight for investors and one of the most difficult to understand.

To be a good investor, you must understand that you WILL lose.

To succeed, you need to have a plan to deal with those losses. Then – despite the pain of the loss – make sure you carry out that plan. 

Remember what we say – Plan the Trade, Trade the Plan.

We think there are many great lessons to be learned from this tennis champion, and we hope you will use them in your trading and investing strategies.