Lose to Win

“Well, what is the crowd made of – the trading crowd, that is? Of above average intelligence; good at their lessons; possessed of highly analytical minds; plausible; conforming. The kind of couth, clean-cut individual that appeals to members of the investment committee, because he (she) resembles them or incarnates the image they have of themselves. Such are the people who run the management funds, bank trading desks, trust departments and economic advisory sections, at the major financial institutions. You can hear the voice of the ‘risk-committee’ meeting in your mind which decides you’ve been naughty, so you close out a perfectly good position. The answer is that 1) trading is a game, which 2) is won by playing according to the rules of the game; and 3) if you do that you make money over time; but 4) it’s OK to lose money, that’s part of the process of winning. If we’re worried about losing money, we have a problem with taking losses, and cutting losses is one of the rules of the game. If we’re worried about keeping the money we’ve made, we have a problem with letting profits run, which is another of the rules of the game. If money matters greatly to us, it may help if we don’t keep tab of our equity – especially when we’re ahead. That may sound odd, but knowing your equity all the time encourages worry; and worry destroys judgement. We must view losses and gains with equanimity.”
John Percival