Maximize your returns by cutting your losers and riding your winners

Earlier this year, JPMorgan released a report analyzing stock returns in the past 40 years.

• 10% of all stocks became a “megawinner” with 500%+ total returns.
• 44% of companies experienced a drop of over 70% and haven’t recovered.

Investors: We’ve seen fund managers repeatedly give similar advice — sell your losers and ride your winners.

It’s counterintuitive advice as we normally want to buy low and sell high. But the stats from JPMorgan backs up this advice.

• If you sell your winners too early, you might miss out on the majority gains of the “megawinners”.
• If you hold on to losers, there might be a ~44% chance of the company staying under its previous level.

The lesson: Don’t get hung up on your losers. They’re not crying over your losses and neither should you. Don’t be afraid to sell just because the position is down.

• You’ll often hear, “It’s only a loss if you sell.” False, it’s already a loss, so get rid of the position and move on to better ones.

Even among professionals, the hit rate — the percentage of winning investments that go up — is rarely above 55%. Meaning, nearly half of a fund manager’s portfolio are losers.