What Separates the Winners From Pretenders in a Market Like This

Albert Einstein

There is an old stock market saying: "Everyone is a genius in a bull market." In other words, when the entire market is rising, it's easy to buy stocks and make money. A rising tide lifts all boats.

What separates professionals from amateurs is the ability to navigate down cycles effectively. Leading hedge funds and superior active investors make their money primarily by outperforming in poor markets. They lose less money in bad markets than other investors. You don't need to outperform substantially in good markets. You win by substantially outperforming in bad markets.

We are currently stuck in an extremely difficult market as investors deal with a war in the Middle East, a reassessment of the AI revolution, and significant economic uncertainty. If you are suffering losses, you are not alone, and you should accept it to some extent as just the nature of the market beast.

The stealth bear market beneath the indexes has been doing real damage to real portfolios for weeks. The most important thing you can do in an environment like this is not try to chase the next great stock or call the bottom correctly. It is to protect what you have.

The best advice I can offer for dealing with this difficult market is to focus on keeping your portfolio balance as close to its highs as possible.

That is essentially a tautology. It is simple to the point of being obvious, but it is at the heart of long-term success. It is the single most important principle in active investing, and most people never fully internalize it.

Why Pullbacks Are So Destructive

The math of recovering from losses is daunting. If you lose 25% of your account, you need a 33% gain just to break even. Lose half, and you need a 100% return before you have recovered a single dollar of real progress. That is not just a long time to wait. It is months or years of effort spent running in place rather than moving forward.

The smaller you keep the drawdowns, the faster you can get back to making real money. Every dollar you protect right now is a dollar that does not need to be recovered before you can start compounding again.

The Compounding Argument

Albert Einstein reportedly called compound interest the eighth wonder of the world. Whether he said it or not, the math behind it is genuinely extraordinary. The only way to benefit from compounding is to keep your account hitting new highs. You cannot compound from a hole.

Most people think of compounding in terms of a single long-term holding. Warren Buffett's decades-long positions in names like Coca-Cola  (KO)  are the classic example. But you can compound just as effectively through active trading. The requirement is the same either way. You have to protect the gains you already have so that your profits have profits to build on.

Why This Is Harder Than It Sounds

Like most things in trading and investing, the principle is simple, and the execution is difficult. If you sell every time a stock pulls back, you will never hold anything long enough to make serious money. 

Even the best stocks go through painful corrections. Apple  (AAPL)  pulled back 57% in 2008 before eventually going up roughly 80-fold from those lows. It has had several drawdowns of 30% or more since then. 

The best high-growth stocks often exhibit elevated volatility. If you sell every time a stock pulls back 8% or 10%, you will never be in the big winners as they realize their potential.

The only way to navigate that without simply sitting through every decline and hoping is to trade actively with discipline. That means having a clear exit point, cutting when it is hit, and then doing the harder thing, which is buying back when conditions improve. 

Most investors can cut a loss. Very few can buy back the same stock they just sold. That reluctance is what separates the people who protect capital from the people who just watch it erode.

What This Means Right Now

In a market like this one, with uncertainty as deep as anything we have seen in a long time, protecting capital is not a passive strategy. It requires active decisions every day. It means having a point where you cut, sticking to it, and resisting the very human temptation to hold on and hope.

The indexes may be telling you the damage is manageable. Your portfolio is probably telling you something different. Trust what you see in your own account, not what the headlines are suggesting about the S&P 500.

Stay defensive. Keep your account as close to its highs as you can. The next real opportunity will come, and when it does, the investors who protected their capital will be the ones positioned to take full advantage of it. The power of compounding awaits those who can keep drawdowns in check.

Related: You Already Know How to Be a Great Investor, So Why Aren't You Doing It?

At the time of publication, Rev Shark had no positions in any securities mentioned.