Here's the Simple Secret to Superior Investment Returns
It isn’t easy to do, but if you make this mantra your focus, then you cannot fail.
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Traders and investors constantly seek the "secret" that will transform their returns from mediocre to spectacular. Plenty of people are willing to sell you the answer, but it never seems to be very simple or easy.
I’m going to tell you what the secret is to great market success. Unfortunately, it requires substantial work and effort to make it work. The reason the market can make you rich is because trading and investing are hard.
The secret is keeping your investment account as close to highs as possible. Try to never let your accounts dip more than 20%. That’s it. That is all you need to do.
There are two reasons why this approach is so successful. The first is that making up losses is a hugely unproductive activity. If your account loses 50%, you must double your money to return to even. That is a tremendous amount of work just to get back to where you started. Instead of making up losses, you want to spend most of your time and effort making fresh profits.
The second reason to always keep accounts close to highs is that you will have the power of compounding working for you. Compounding is why Warren Buffett is one of the wealthiest people in the world. When you produce gains on your gains, your capital base will grow, and your investment returns will skyrocket.
Keeping your accounts close to highs sounds like simple advice, but it is tremendously difficult. You can’t just set stops and dump any stock with a minor pullback. You can, but it will be impossible to hold very much through ordinary volatility. The best stocks in the world will go through big swings as they develop. For example, Apple AAPL dropped 52% in a single day on September 29, 2000, when it was still a low-priced stock. During the Great Recession in 2008, Apple was down 57% before it rebounded and made a series of many new highs over the years.
To keep accounts near highs, you must focus on two things. The first is rebuying good stocks you have sold due to downside volatility, and the second is to vary position sizes as the technical conditions of an individual stock shift.
The most common mistake people make when trying to keep accounts close to highs is that they sell a great stock and never rebuy it. They end up sitting on the sidelines, and they resolve that next time, they will just buy and hold and not miss out. That may work, but if you work hard at the rebuy after a sale, you can produce substantially better results.
What I find best is trading incrementally and varying position size as conditions shift. I don’t want to totally dump a stock that I like that is going through a rough period, but I want to reduce my exposure when it is hurting my portfolio performance and then ramp it back up when technical conditions continue.
This approach is not easy. It requires you to be vigilant and constantly adjust your holdings. You can’t let inertia take hold when things are difficult.
Make “keep accounts near highs" your mantra. If that is your focus and you are willing to do the work, superior investing results are inevitable.
At the time of publication, DePorre had no positions in any securities mentioned.
