Fundamentally, investing is all about making more than you lose.
Nothing else matters.
This is what so many investors get wrong. They think success comes from finding cheap stocks or chasing the hottest names. P/E ratios, moving averages, moats, and business models are only a piece of the puzzle. All of that can help. But none of it guarantees success by itself.
What really matters is this.
How much do you make when you are right?
How much do you lose when you are wrong?
This applies to day traders and long term investors alike. The only real difference between them is the timeframe. The principle stays the same.
The important lesson here is that you will be wrong. A lot.
Investing is a game of probabilities.
Even if you think it can’t go lower because it’s so cheap, or it has to go higher because all the fundamentals are going up speak for it, you will still be wrong.
A good rule of thumb is to assume you are right at best 50% of the time.
Think about sports. Michael Jordan missed about half of his shots. And he is still considered the greatest ever. You do not need to be right all the time to win big.
Even in great markets, this happens.
In tougher markets, it gets worse. Sometimes you are right only 30% of the time.
That is normal.
Mistakes are not failure. They are part of the process.
Once you accept that, everything changes.
Your focus shifts from being right to managing outcomes.
This simple table makes it very clear.
This shows the link between win rate and the risk reward ratio.
Let us assume you are right only 30% of the time.
In that case, your winners need to be more than 2 times bigger than your losses just to break even. To actually make money, they should be about 3 times bigger. That is when the math starts working in your favor.
The goal is to build failure into your strategy.
A 50% win rate sounds nice, but it is not realistic over long periods. Markets change. Conditions get worse. That is why your strategy should work even in a bad environment.
Starting with a 30% win rate and a 3 to 1 risk reward is a good starting point. You can adjust later. But if you do not know where to start, start here.
So what does this mean in practice?
Many investors think buy and hold means never selling. That is only half right.
You want to buy and hold winners, not losses.
You never know how far a winner will go. Sometimes it is 10%. Sometimes 20%. In rare cases, it can be 100% or more. Of course, you want to get out, if your thesis breaks or it the fundamentals or technicals deteriorate. But let your winners run as long as possible.
In order to know when to cut your losses you need to calculate your average gain. Let's say your average gain is around 30%, then to keep a 3 to 1 risk reward, your average loss should be around 10%.
There are many ways to do this. You can adjust position size. Or you can sell in steps, for example at -5%, -10%, and -15%. On average, that still keeps your loss near 10% if you sell one third each time.
The exact method does not matter as much as the principle.
Big winners pay for many small losses.
Small losses protect you from disaster.
More on how to apply this step by step in the next chapter.
Fundamentally, investing is all about making more than you lose.
Nothing else matters.
This is what so many investors get wrong. They think success comes from finding cheap stocks or chasing the hottest names. P/E ratios, moving averages, moats, and business models are only a piece of the puzzle. All of that can help. But none of it guarantees success by itself.
What really matters is this.
How much do you make when you are right?
How much do you lose when you are wrong?
This applies to day traders and long term investors alike. The only real difference between them is the timeframe. The principle stays the same.
The important lesson here is that you will be wrong. A lot.
Investing is a game of probabilities.
Even if you think it can’t go lower because it’s so cheap, or it has to go higher because all the fundamentals are going up speak for it, you will still be wrong.
A good rule of thumb is to assume you are right at best 50% of the time.
Think about sports. Michael Jordan missed about half of his shots. And he is still considered the greatest ever. You do not need to be right all the time to win big.
Even in great markets, this happens.
In tougher markets, it gets worse. Sometimes you are right only 30% of the time.
That is normal.
Mistakes are not failure. They are part of the process.
Once you accept that, everything changes.
Your focus shifts from being right to managing outcomes.
This simple table makes it very clear.
This shows the link between win rate and the risk reward ratio.
Let us assume you are right only 30% of the time.
In that case, your winners need to be more than 2 times bigger than your losses just to break even. To actually make money, they should be about 3 times bigger. That is when the math starts working in your favor.
The goal is to build failure into your strategy.
A 50% win rate sounds nice, but it is not realistic over long periods. Markets change. Conditions get worse. That is why your strategy should work even in a bad environment.
Starting with a 30% win rate and a 3 to 1 risk reward is a good starting point. You can adjust later. But if you do not know where to start, start here.
So what does this mean in practice?
Many investors think buy and hold means never selling. That is only half right.
You want to buy and hold winners, not losses.
You never know how far a winner will go. Sometimes it is 10%. Sometimes 20%. In rare cases, it can be 100% or more. Of course, you want to get out, if your thesis breaks or it the fundamentals or technicals deteriorate. But let your winners run as long as possible.
In order to know when to cut your losses you need to calculate your average gain. Let's say your average gain is around 30%, then to keep a 3 to 1 risk reward, your average loss should be around 10%.
There are many ways to do this. You can adjust position size. Or you can sell in steps, for example at -5%, -10%, and -15%. On average, that still keeps your loss near 10% if you sell one third each time.
The exact method does not matter as much as the principle.
Big winners pay for many small losses.
Small losses protect you from disaster.
More on how to apply this step by step in the next chapter.
Fundamentally, investing is all about making more than you lose.
Nothing else matters.
This is what so many investors get wrong. They think success comes from finding cheap stocks or chasing the hottest names. P/E ratios, moving averages, moats, and business models are only a piece of the puzzle. All of that can help. But none of it guarantees success by itself.
What really matters is this.
How much do you make when you are right?
How much do you lose when you are wrong?
This applies to day traders and long term investors alike. The only real difference between them is the timeframe. The principle stays the same.
The important lesson here is that you will be wrong. A lot.
Investing is a game of probabilities.
Even if you think it can’t go lower because it’s so cheap, or it has to go higher because all the fundamentals are going up speak for it, you will still be wrong.
A good rule of thumb is to assume you are right at best 50% of the time.
Think about sports. Michael Jordan missed about half of his shots. And he is still considered the greatest ever. You do not need to be right all the time to win big.
Even in great markets, this happens.
In tougher markets, it gets worse. Sometimes you are right only 30% of the time.
That is normal.
Mistakes are not failure. They are part of the process.
Once you accept that, everything changes.
Your focus shifts from being right to managing outcomes.
This simple table makes it very clear.
This shows the link between win rate and the risk reward ratio.
Let us assume you are right only 30% of the time.
In that case, your winners need to be more than 2 times bigger than your losses just to break even. To actually make money, they should be about 3 times bigger. That is when the math starts working in your favor.
The goal is to build failure into your strategy.
A 50% win rate sounds nice, but it is not realistic over long periods. Markets change. Conditions get worse. That is why your strategy should work even in a bad environment.
Starting with a 30% win rate and a 3 to 1 risk reward is a good starting point. You can adjust later. But if you do not know where to start, start here.
So what does this mean in practice?
Many investors think buy and hold means never selling. That is only half right.
You want to buy and hold winners, not losses.
You never know how far a winner will go. Sometimes it is 10%. Sometimes 20%. In rare cases, it can be 100% or more. Of course, you want to get out, if your thesis breaks or it the fundamentals or technicals deteriorate. But let your winners run as long as possible.
In order to know when to cut your losses you need to calculate your average gain. Let's say your average gain is around 30%, then to keep a 3 to 1 risk reward, your average loss should be around 10%.
There are many ways to do this. You can adjust position size. Or you can sell in steps, for example at -5%, -10%, and -15%. On average, that still keeps your loss near 10% if you sell one third each time.
The exact method does not matter as much as the principle.
Big winners pay for many small losses.
Small losses protect you from disaster.
More on how to apply this step by step in the next chapter.
