Larry Williams starts-off his benchmark contribution to trading, “Long-Term Secrets to Short-Term Trading”, with an immensely important concept that all too often is ignored by traders; managing your losses is more important than managing your gains.

Larry Williams is a commodity trader, author and researcher. In his career he has authored several books, mostly on stocks and commodity trading. Williams has created numerous market indicators including accumulation/distribution indicators, cycle forecasts, ultimate oscillator and market sentiment Indices.

Williams won the 1987 World Cup of Futures Trading from the Robbins Trading Company, where he turned $10,000 into $1,100,000 in a 12-month competition. In 1997, his daughter Michelle Williams, an Oscar nominated actress, won the same competition by turning $10,000 into $100,000 in a year.

Back to the topic of this article; assuming the typical investor keeps a balanced portfolio of assets, it is only natural that some of these investments will show a negative performance. Permit me to add, in my experience as an investment manager the days when all my investments showed a gain is extremely rare.

While I am often reluctant to ‘review’ investment portfolios; I am responsible for funds and institutional clients, I often get side-tracked by friends and relatives wanting an opinion on their investments. A common question being, ‘shall I take profits on my gains?’ to which I very often find myself replying ‘depends, but you definitely need to write-off your losses’.

First time and experienced investors alike find it very hard to part with an investment when it is in the red. I have seen investors hold on to a loss-making investment for dear life, very often turning a five percent loss into a ten percent loss and a ten percent loss soon becomes twenty percent.

What happens is that at some point investors forget their investment objective. Whether you are a long-term fundamental investor assuming that your favorite company will increase sales in Asia or whether you are a short-term trader expecting the price of oil to rebound from recent lows… it is not possible to always get it right.

And when it becomes obvious that the underlying reasons behind your investment objectives no longer exist, the only factor that remains is hope… and hope is a very poor investment argument.

Let’s put it in perspective. Suppose an investment advisor recommends a stock and his argument for investing is his hope that the price will go up. Would you trust him with your money to invest? Therefore, if your gut feeling is only based on hope, does it make sense to remain invested in that stock? Always remind yourself why you invested in a particular stock in the first place. If the situation changes, your strategy should too.

Thus prior to investing I always set a profit target, which I tend to ignore. I also set a maximum loss limit which I strictly adhere to. Experience has taught me that sometimes the stock that fell 15 percent recovers. But the chances are that all other investments, in the meantime, have performed at least just as well. So cutting your losses and investing in the next potential winner makes mathematical sense.

On the other hand, finding yourself with a 25 percent loss after hoping to recover your 15 percent loss only places you in a more difficult position. In addition, your one loss making asset may dent any positive performance from other assets in a well-structured portfolio.

I suggest comparing managing a portfolio to managing a football team. If your top striker is playing fine, keep him in the team, it is silly to substitute him. When he starts to tire, send your sub to warm-up, but your top striker can still add value to the team. But if he gets injured keeping him on the field hoping that a lucky goal can win the day is pointless and may lead to the whole team losing the game; better bring on the sub.

This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.