Entry – 008
I’ve got a few scars from the battle with the markets, the kind you only earn by sitting there, watching a perfectly reasonable idea turn into a slow‑motion train wreck on your screen.
Early in my career, I treated every position like a referendum on my intelligence. If a stock went against me, I didn’t just see red on the chart; I felt it in my gut. Selling meant admitting I was wrong, so I “gave it a little more room.” Then a little more. Then a little more after that. By the time the dust settled, what started as a manageable pullback had turned into a drawdown big enough to make me question whether I should be in this business at all.
That’s when it clicked for me: the market wasn’t attacking my self‑worth; it was just doing what it does. Prices move. Trends end. Environments change. The problem wasn’t the market, it was my refusal to admit I was wrong and move on.
Out of those battle scars came one of the most important lessons I’ve learned as a portfolio manager:
Risk‑managed investing starts with accepting that you will be wrong sometimes, and then building a process where small, controlled losses are simply the cost of doing business while bigger winners are allowed to compound.
No One Bats 1,000
If you’re going to put capital at risk in public markets, you have to start from a place of intellectual honesty: even the best investors have a batting average that includes plenty of strikeouts. The edge doesn’t come from predicting every move correctly; it comes from what you do when the market disagrees with you.
In a risk‑aware framework, every position is a hypothesis about price, trend, and environment—not a statement about who you are as a person. When the evidence changes, the trade can change with it. That’s not a moral failure; that’s professionalism.
The Math Of Small Losses
Let’s talk about the arithmetic behind this.
Imagine you have a simple payoff structure: one winner at 20% and four losers at 5% each. Do the math and you’re roughly at breakeven:
On paper, that’s not a result anyone brags about. But underneath, something powerful is happening: you took five swings, and you prevented a single bad idea from turning into a portfolio‑level wound.
Now extend that discipline. Add a few trades where the winners don’t stop at 20%—maybe they run 30–40%—while you continue to cap losses in that 3–5% range. Suddenly, your overall results start to look very different, and you got there without ever asking a client to sit through a 30–50% drawdown in their account.
That’s what a defense‑first mindset really is: keep the downside small and repeatable so the upside has room to matter.
Why Drawdowns Matter
Big drawdowns aren’t just a math problem; they’re a human problem.
A 50% loss requires a 100% gain just to get back to even. That’s a steep hill numerically, but it’s even steeper emotionally. Those are the moments when clients are most likely to capitulate—when the pain of staying in feels worse than the regret of selling out.
History is full of examples. Some of the best‑performing stocks over the last few decades have spent long stretches down 50% or more from their highs. If you’re a long‑term investor, the goal is not to eliminate volatility—that’s impossible. The goal is to avoid the kind of volatility that knocks you, or your clients, out of the game.
Markets Change, Hypotheses Break
Even fundamentally strong companies can see their stock prices cut in half when the environment shifts.
We’ve seen mega‑cap names with real businesses—tens of billions in revenue, global footprints, solid franchises—lose 50–70% of their market value when narratives, interest rates, or technology cycles turned. It wasn’t that the business disappeared overnight; the market simply decided to reprice the risk and the future.
The lesson is straightforward: “great company” and “great stock at this price, in this environment” are not the same statement. There is no prize for going down with the ship.
Stocks Are Liquid – Use That
One of the biggest advantages in public equities is liquidity.
If your thesis breaks, you can usually exit in seconds at a transparent price. That’s a very different world from something like real estate, where you need marketing, showings, appraisals, and financing before you can even think about closing a sale.
In stocks, refusing to sell a loser often has less to do with “long‑term conviction” and more to do with ego. The quiet voice in the back of your head says, “If I sell, I’m admitting I was wrong.” A good risk discipline flips that story. A small, controlled loss is evidence that your process is working. It means your guardrails did exactly what they were supposed to do.
Cutting Losses, Letting Winners Run
There’s an old market line that has survived for a reason: “Cut your losses short and let your profits run.”
It works because it pushes directly against our wiring. Left to our own devices, most of us:
Nurse losers to avoid the pain of realization.
Cash winners quickly to lock in the relief of being “right.”
That behavior is the opposite of what compounding requires.
In practice, flipping that script means:
Defining risk before entry: Where is the thesis invalidated? How much of the portfolio are we willing to risk to find out?
Using predefined exit rules for losses: If the price or trend violates that key level, we reduce or exit instead of debating with the screen.
Allowing strength to prove itself: When a position is working and the environment supports it, we resist random profit‑taking and instead walk our risk levels higher over time.
That’s how a single 20% winner can coexist with a series of small scratches and still be a meaningful contributor to long‑term growth.
Humbling The Ego
At the end of the day, risk management is as much about ego as it is about spreadsheets.
Every time a stop gets hit, it’s a reminder that the market doesn’t care how much work you put into the idea. Our job is to treat that signal as neutral information: “The market disagrees. Capital is better deployed somewhere else.”
Some of the best investors in history have been candid about their hit rates—being wrong 40–50% of the time on individual ideas, yet building excellent long‑term records because their losses were consistently smaller than their winners. The ego wants to be right. The portfolio just needs us to be disciplined.
That’s the lesson my own scars taught me: you don’t need to bat 1.000 to reach your goals—you need a process that survives your inevitable strikeouts and lets your best swings carry the scorecard.
This article reflects my personal views and experiences and is provided for general informational purposes only. It is not individualized investment, tax, or legal advice. All investing involves risk, including the possible loss of principal. The charts and examples shown are based on historical and hypothetical backtested data and do not represent actual trading or client results. Past performance, whether actual or hypothetical, does not guarantee future results, and no strategy can avoid losses or guarantee success in any market.
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