Investing, like most everything, is a game of odds.
You start with a 50/50 chance that a stock’s price will go higher. Then, you do everything you can possibly do to bump up your odds of success… if even by just a few percentage points. The best traders in the world are thrilled to make money on six out of 10 trades.
But that’s only half the story.
In addition to an investor’s odds of winning on any particular trade, he must also know how much he stands to win or lose. And, how to keep those losses to the bare minimum.
Winning a dollar 50% of the time, and losing $5 the other 50% of the time gets you nowhere but broke. And fast.
Instead, the goal is to cut losses short… and let profits run. If you can find investable opportunities that pay $2, or $3… or better still $4… for every $1 lost on trades that turnrn sour… that’s a recipe for long-term success.
The trouble is, most investors fall victim to their natural urge to do just the opposite. They lock in small profits… and let losses spiral out of control. It’s tough to take a loss. But usually, it’s the right thing to do.
Take our Boom & Bust portfolio, for example. It’s looking good right now. Of 14 open positions, 13 are profitable. We have taken a few knocks though.
Sallie Mae (NYSE: SLM) – the private student loan lender – was one of them. We recommended betting against the stock in January 2012, as our research into the massive student loan bubble made it appear a crash was likely. That never came to be (at least it hasn’t happened yet)… so we later recommended subscribers exit the position to keep losses at a minimum.
And it’s a good thing we did. More than six months later, the student loan bubble is still inflating. And, Sallie Mae’s stock price is 30% higher.
As we told subscribers back in October, “We see the student loan bubble as utterly unsustainable. The problem is, unsustainable situations sometimes persist longer than our investment timeframe permits.”
We kept a vigilant watch on this play. We stand to fight another day…