Learn To Lose...

As Warren Buffett once said, investing (and trading) is “simple but not easy.”

One of the most challenging skills for new traders is recognizing that losses are part of the process. They will happen in any strategy; a loss does not reflect your trading skill.

Losses – and taking them appropriately – are a good sign. Trying to avoid them at all costs is also a way to almost certainly NOT make money.

As many of you know, my parents met in Reno, Nevada. My mother, at one time, worked as a "cigarette girl" in a casino (that was a thing), and my dad was a professional gambler for many years. Since an early age, I have been surrounded by gambling and fascinated by probability.

My favorite game is blackjack. What I like about it is that there is a well-defined strategy. Depending on what cards you are dealt and what the dealer is showing, you know exactly what you should do next.

Play "perfect" blackjack, and you will still lose. Obviously, it is better to be the casino! But you know your odds, especially when looking at any particular hand.

Even when looking at a "can't lose" hand, you still CAN lose. This is what probability is all about. You want to bet – or bet more when you have a high chance of success, but that still signifies you have a chance of failure.

Successful players aren't happy to lose, but they understand it is part of the process. They don't get upset or take it personally. They simply move on to the next hand.

You can always identify the novice player at the table as the one who throws their hands up when they lose. They also blame other players for “taking their cards” if they hit and get a card that wouldn’t help.

They are emotional and don’t understand the fundamental math behind the game. They also are never sustainably successful.

We recently read a fascinating insight. Few traders or investors talk about how they handle losing, but we see plenty bragging about their successes—especially younger investors.

Now there are a few out there – like Steven Burns and Mark Minervini – that do a great job of talking about handling losses. Most of the “noise,” however, is coming from braggarts showing off their winnings.

This isn’t helpful for your own process or future success.

It is the very nature of trading that you will have losses—many of them.

If you have a strategy targeting very high returns, you will likely have significant losses. You can't have one without the other.

It hurts our ego to focus on our losses. It doesn’t make us feel good. Remember that we feel negative feedback at a ratio of eight times greater than positive feedback. Dissecting our losses is one of the most complex parts of improving as a trader. It is also one of the most important.

The key to losing is figuring out how to manage your losses. Keep them small. Know which ones to take and when to take them. Managing your losses is much more important than managing your gains.

Newer traders often will not pull the trigger because they are waiting for the "perfect" situation. They aren't willing to take a loss. Most often, this results in them failing to make any gains.

Remember the old NY Lotto slogan – “You can’t win if you don’t play!”

One of the greatest traders of all time – Jesse Livermore – would often start a trade with a small amount of capital. Then, if the idea worked out, he would put more money into the trade.

This is the strategy that powers the capital allocation process of the largest and most successful multi-strategy hedge funds. Funds you have heard of like Citadel and Millenium.

We think this is a strategy that can also work for novice traders. Start small and see if it works. If it does, add more; if not, take the loss and move on. The loss will be small.

The purpose of investing is to make the gains, but the key to success is learning how to take the losses.