Admit You're a Loser, and Expect to Die

You Will Lose Eventually At Investing. Prepare for it.

Another round of pontification on investor “conditioning.”

In sports, “conditioning” exercises are done at the beginning of a season as “boot camp” when you’ve been off track on your workout routine. They are designed to get your body readjusted to the regular regime of intense workouts and competitions. They get you in shape so you can perform like a champ.

Investing of any kind also requires conditioning, only we condition mindsets, behavior, and actions. Short-term investing, sometimes called “trading,” requires what I like to call “bushido” conditioning. “Bushido” is the samurai code of honor, which particularly emphasizes courage, discipline, and swift obedience .

Surviving short-term trading in instruments with higher risk, like options, requires you to develop a “bushido” mindset. I’ve ranted on my soapbox repeatedly in the past about the necessity of having an exit plan for every investment—designating trailing stops and sticking to them with military-like discipline.

But let me do you one better than just telling you to have a plan.

If you don't have a plan, your money's going to hell in a handbasket

Instead of just sitting around and hoping things don’t go south... expect things to go to hell in a hand-basket every time you do a trade. Prepare for this eventuality. You’ll have mentally conditioned yourself to get out as soon as possible.

Don’t allow yourself to rationalize being trapped in a bad decision and pretend it doesn’t exist.

Trading 101 dictates that your ultimate survival hinges on getting out of losing trades early. Why? Small losses can quickly go parabolic into catastrophic failures. The bigger your loss becomes, the higher percent gain you have to see in your position in order to get break even.

If you’re making trades which you know have high probability for upside and low likelihood of downside, you should know pretty early if things aren’t panning out. Take the paper cut, not the flesh wound.

The problem is, the average investor gets scared of the paper cut... they want complete victory, and they don’t want to be proven wrong. They begin to see red in their account and fear immediately begins to dominate their thoughts... they lose sleep at night... and they end up on the couch when they have to tell their spouse they’ve bet the rent money.

Watching frogs boil: committing financial suicide

Do you want to have frog for dinner? OK, then sit around and watch your “frogs” boil... that’s my analogy for sitting on losses, watching them get worse and worse.

Cut your losses, let your winners ride. A rational trailing stop plan is easy to determine, and easy to execute if you are a bushido-loving samurai.

I’m not just preaching to you—I’ve been there. I’ve made the mistakes and rationalization I’m telling you to avoid.

Lesson learned:  Don’t get your arse handed to you. Set trailing stops. Expect to lose every time. Don’t be afraid to be a little wrong. It’s a lot less painful than “a lot wrong.”

Live long and invest,

Jeremiah