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.