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it’s even cheaper now and we’re averaging down”. Let
me translate: The position is losing money but we’re so
stubborn that we’re going to keep throwing money at.
While the sound bite does a good job of ignoring the loss
and preventing him from looking bad, the reality is at odds.
He lost money. His investment thesis or his timing, or both,
were wrong. The position is a dog and it should be cut.
At a hedge fund, people only care about one thing:
performance. Make money, cut losers and you’ll be OK.
This is how it goes:
• If you “had the right idea but were too early”, it means
one thing: you lost money.
• If you “had a good stock pick but the overall market
doesn’t care about fundamentals”, you lost money.
• If you “took a ton of ‘heat’ on your short but the
market finally caught on”, it means you should have
been stopped out.
• If you “picked a good long-term growth story that the
market finally woke up to”, it means you made money.
Profits and losses (P&L) are what matters, not
the story that you attach to your actions. And if you’re
relying on crutches like “I was early” or “the market just
doesn’t recognise my thesis” to excuse your losses,
then you’re too busy defending your ego and not busy
enough generating performance and practicing proper
risk management.
Focus on what matters most. Have an investment
process and stick to it. Proper solid risk management.
And above all, don’t worry about being right or looking
smart in front of TV audiences. Focus on making money.
You Absolutely Need a Process
If you talk to a trader who is starting out, they are often
grasping for something, anything that works reliably.
They are probably looking to find a style that fits their
personality and is profitable. While that is expected when
people are just starting out, this is absolutely unacceptable
when you work in an institutional environment.
If you are starting a hedge fund, then you should
already know what your “edge” is. After a few years of
working in the market, then you know what you need to
do to make money consistently. Instead of searching for
something that works, you possess all the confidence of
knowing that you have an advantage. If anything, like most
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