Traders, especially of the mom-and-pop variety, have the tendency to cling to losing positions while taking profits in the winners. Chalk it up to human nature — and the market axioms that are constantly pounded into their heads.
“Pigs get slaughtered” comes to mind.
But Jon Boorman, a portfolio manager at Broadsword Capital, LLC, says that approach often proves costly when it comes to managing your portfolio.
And he’s got a solution.
“One of the driving factors behind our compulsion to act is the profit we see in dollar terms or as a percentage return,” he explained in a post on SparkFin. “Why do we feel the urge to take that profit simply because it’s up 10%, 20%, 50%, or even 100% from where we bought it? Because it’s a nice big round number and it makes you feel good? Pretty much.”
So what’s a guy to do? Well, try removing that column and just scrubbing the performance numbers from the page completely.
“Didn’t you enter the position based on its price action, its technical pattern, its value, its trend?” Boorman asked. “So why would you exit based on your P&L?”
He used this set-up as an example:
“One of these positions is up 48% from its entry, another up 27%. One is -2%, another -5%,” he said. “You’d have no idea which and you don’t need to. It’s irrelevant. Knowing that information will only tempt you to treat it differently.”
Basically, Boorman says to focus on your positions, not your P&L.
“Do that, and you may find yourself running winners longer and for larger gains than had you left yourself open to the emotional biases from monitoring your return,” he said.