Nobody enjoys losing, but success requires the ability to accept a loss. Just speak with a few of the most successful hedge fund managers in history. It isn’t about being correct, George Soros once remarked; it’s about how much money you earn when you’re right against how much money you lose when you’re wrong.
Stanley Druckenmiller, a very successful student of Soros, once said in an interview that he believes he is correct about 60% of the time. He is thus mistaken 40% of the time. Another billionaire macro icon, Paul Tudor Jones, has said that he is wrong approximately as frequently as he is correct, but he agrees with Soros that the sum of one’s wins is more important than the sum of one’s losses.
This implies that many of the world’s most successful hedge fund managers are often mistaken. And they don’t care since it is just crucial in terms of the game and not what is most important. What matters to them is risk management for their concepts and the asymmetry between their winning and failed ideas.
Accepting loss is, of course, easier said than done since it is human nature to loathe loss; thus, absorbing losses regularly may be difficult to swallow for many. However, it would help if you embraced it since it is a necessary component of the game and what will ultimately keep you playing. Additionally, you may move on to the next possible winner more quickly the quicker a concept reaches its breaking point.
Losses are not all made equal. When you consistently suffer losses or suffer losses that are too large in comparison to your victories, this should raise warning signs. A loss may result from market circumstances unfavorable to your trading strategy or style, or it may be a sign that you are not regularly adhering to your trading guidelines.
Take a critical look at what you are doing while going through a losing streak (drawdown). Check your transaction record and diary to evaluate whether you are trading according to plan or veering off course. Determine what you need to do to go back on track if you see that you are veering off course. Losing in this situation is unacceptable since it was your fault.
Although you should be adaptable to changing market circumstances, if you are following a sound, time-tested approach across many cycles, you should still be successful. This is especially true if you are following your plan and the market is not supportive of your strategy. Here, consistency is crucial, as is sticking with the plan despite setbacks.
- The company’s most delicate don’t emphasize being correct all the time and recognize that accepting losses is part of the game.
- The most critical factors are asymmetrical win/loss ratios and minimizing the risk of winning versus losing ideas.
- But not all losses are the same; you need to know when losing is due to changes in the market and when it results from straying from your trading strategy.