Show Me a Good Loser, and I'll Show You a Good Trader

Hall of Fame soccer coach Vince Lombardi once said, "Show me a good loser and I'll show you a loser." It's an understandable feeling in sport where the effort never to fail, never to lose and never to stop is the key to success. There is no benefit in giving up and admitting that you will lose in a sport like soccer.

In other endeavors, it is extremely important to admit that you are in a bad position and you are unlikely to get your way. For example, professional poker players fold a significant number of their hands. It is a smart strategy to take a small loss straight away instead of pressing further when the cards are not in your favor. You may end up with some luck if you stay in, but it's not the wise bet. Better to protect valuable capital and wait for a better opportunity.

Poker players who fold are not ashamed to fold. It is an essential strategy if you are going to win. It's only part of the process of professional gambling and it helps improve your overall chances of winning.

Taking losses while trading stocks should be no different than folding a hand in poker. It's important to long-term success, but unlike poker, many traders are reluctant to fold and admit that they are in a bad trade that is unlikely to work. Not only do they tie up their capital, but also their emotional energy to overcome a situation with little chance of success.

Bad trades are too often viewed as personal failure and a mark of shame. There can be a lot of pressure to pretend our stock selections are perfect and our decision-making always results in profits.

While it is important to do our best, it is extremely important to realize that it is impossible to be perfect in the stock market. The goal of trading is not perfection. The goal is to make as much money as possible when you are right and minimize losses when you are wrong. You can be wrong far more than half the time if you are making the most of your winning trades.

The main benefit of losing trades is that you can take more risk. If you try too hard never to lose, the chances are that you will never take a huge risk. If you only made trades that you believed would be successful, you would never take a trade.

A common problem for many traders is "analysis paralysis". Instead of putting their money on the line and seeing if a trade works, they keep looking for an edge that guarantees they can't lose. They want the perfect setup, but by the time it becomes clear they are right, the big step has already taken place.

Jesse Livermore, considered by many to be one of the greatest traders of all time, would use a strategy he calls "exploratory trades" to determine if he is on the right track. He would get some money on the line quickly and then watch the trade as it play out. If he felt good about it, he would leverage his investment. If he didn't like the way it was acting, he would accept his loss and move on. There was no shame buying wrong. The losses he suffered while looking for big winners were only part of the process, much like what happened in poker.

This fear of being wrong not only causes traders to avoid making trades that turn out to be good, but often keeps them in a trade that is not working. The longer a trader holds a stock that isn't working, the more likely they are to invest in it, both emotionally and financially. It gets harder and harder to cut a straggler after you've seen them in your portfolio for months or years. We are all susceptible to what is known in behavioral economics as "confirmatory bias," which means that we are only looking for evidence to confirm our positive point of view.

A lot of my best trading results come from trades that look bad at first, but if I were too precise with my entry points and waited for perfect conditions, I would never be in the stock. Sometimes you just have to put your money on the line and see what happens.

The stock market is not like baseball. You don't have to have a high batting average to get huge returns. As long as you have capital, you have unlimited swings.

If you are not losing trades all the time, you are not trying very hard. As hockey all-star Wayne Gretzky once said, "You miss 100% of the shots that you don't take."

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