A Closer Look At 'Cut Your Losses Early; Let Your Profits Run'

Mark

I thought that this was an interesting article for one's investing digestion. Feel free to disagree. It's from SeekingAlpha for those who shun such things or have trouble accessing the information.

"Summary

° "Cutting losses quickly and letting profits run" (CLE-LPR) is arguably the single most popular piece of advice offered to professional traders at the start of their careers.
° In stock market investing, a CLE-LPR strategy has lead to higher returns compared to a static portfolio of stocks and T-bills with the same average exposure, over the past century.
° There is a close connection between CLE-LPR and Momentum-based investing.
° We explore some not-so-obvious reasons why many hedge funds are committed to the tenet of cutting losses early and letting profits run."

A Closer Look At 'Cut Your Losses Early; Let Your Profits Run'

Junkster

The first trading book I ever read, “How I Made $2,000,000 In The Stock Market” by Nicolas Darvas, taught me the precept of always cutting my losses and letting my profits run as well as the power of trading momentum, The book had a huge impact on my life so I am a believer. But……. Please note the article linked by the OP was written by a founding member of Long Term Capital Management. We all know how that turned out. Probably explains why he then took a 10 year sabbatical from the markets.

Also regarding hedge funds who are are glorified for employing the strategy of cutting losses letting profits run and momentum trading. Their long term performance compared to simply buying and holding the S@P is beyond woeful. See the link below to where depending on the time period the S@P won by a 3x to 4x margin. Bear markets, which are few and far between are where the hedge funds win. Even though even then they are still losers.

https://www.aei.org/carpe-diem/the-sp-500-index-out-performed-hedge-funds-over-the-last-10-years-and-it-wasnt-even-close/

Mark

All good points @Junkster and thank you for weighing in. I too became a believer in cutting losses early and to this day have not learned when to sell my winners (e.g. I bought Mickey D @$13 circa 2003 and still hold it) and see no magical prowess in hedge funds as you aptly pointed out. Everyone and anyone can have their bad days.

FD1000

"Cutting losses quickly and letting profits run" is the right way.

1) It took me about 18 years (1995-2013) to get it until I got to a nice-size portfolio. In those years I was invested at 99+%. When the funds I owned lagged, I just switched to better-performing risk/reward funds.
2) In 2013, I added 2 new rules based on quicker market movements. Sell any stock/allocation fund if it loses more than 6% from the last top and sell any bond fund with more than 3% loss.
3) In 2017, one year prior to retirement, I implemented a new system, trading mostly bond funds. I would sell any bond fund before it reaches a 1% loss from the last top. Trading in/out is based on the big picture(risk is very high=out, otherwise=in) + uptrends.
Basically, I could be 99+% in or out. It's not about relative performance anymore, it's about protecting my portfolio first.

ET91

Instead of cutting losses quickly, I have often employed average down. That turned out to be a disaster for some funds. Ones that stand out are ZEOIX, and Third Avenue Credit fund. Interesting that both of them are high yield bond funds. I guess I didn't understand liquidity (3rd ave) and bond being above equities interms of safety. I think I read somewhere that Marty Withman didn't do as well when owning high yield bonds vs. stocks.