| How You Really Make Money Investing
The Investment U E-Letter How You Really Make Money Investing “It doesn’t matter how many times you are right or wrong, but rather how big your winners are.” My friend Mike, in conversation I don’t think I remind you of this often enough but this is what matters. I’ve seen it all Through my career I’ve run my own hedge fund, run the activities of a mutual fund, headed up research departments, earned a Ph.D., and been a broker with hundreds of customers. Trust me, I’ve seen people try everything. The way people end up getting rich off of their investments is having a few major winners. These are the people that didn’t sell Microsoft when it showed a 25% profit, but instead held on for years – and thousands of percent gains. They didn’t sell Intel when they were up 15%, or Dell, or you name it. It may have been luck. Or it may have been that these people knew that the key to success was having a few big winners among an otherwise ho-hum portfolio. Of course, the trick is, you can’t lose all your money on the way to your big winners. You’ve got to trim the weeds, take out the garbage, whatever you want to call it. You never let small losses become big losses. Go Ahead and Be Wrong – But Limit Your Losses I recommend that people don’t ever let themselves lose more than 25% on an investment. Get out, no ifs, ands or buts. (I actually recommend a 25% trailing stop, too, meaning if you buy a stock at $10, and it goes to $20, you’d have to sell if it fell to $15, without a doubt.) By doing this, you can be wrong as often as the world’s best investors – I’ve found that great investors are often only right about 35% of the time They lose money on two out of three investments. So why are they considered great? Their total returns are enormous because the size of the winners far outpaces the size of their losers. Don’t worry about taking a loss sometimes. The goal is not to get every one right. The goal is the overall return. Thanks to my friend Mike for the good reminder that basically, “It doesn’t matter how many times you are right or wrong, but rather how big your winners are.” Don’t forget it. Today’s IU Cribsheet
Good investing, Steve |
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