Papale on Taking Losses

By Steve Papale

Soft. That was my response when I heard they were cancelling school due to the cold. Guess what. We live in Chicago. It gets cold here. That’s why they make things like coats and hats and gloves and scarves. At the risk of sounding like my dad, I told my kids I never remember having school cancelled because of cold in the winter when I was their age. We had a few snow days because the buses could not get through. Well, I guess times have changed. Kids are happy. Teachers probably too. Gotta go. Kids are getting dressed to head outside to play hockey.

Taking a loss. No trader likes to do this. First and foremost it means we lost money – the lifeblood of our business. Second we have to admit we were wrong. Traders I think have a hard time with that one. Trading is fiercely competitive. Further, there is very little if any “qualitative” value traders can hang their hats on.

What I mean by that is the success of a trader is clear and one dimensional – the bottom line. If profitable then he is successful. If he is not profitable than he will be quickly out of business. In other businesses people might be good in admin or with people or maybe with numbers. There are different criteria a person’s success might be measured on. But none of that matters in trading. Some of it may be required but it is all peripheral to the business of P and L.

So some of us must learn to take a loss. It’s human nature to want to be right. And human when a trade goes against us to “wish and hope” the market back in our favor. But over the long run it is a fools game. Even if you are right you will eventually be run out of business. The market can stay mispriced longer than most of us can remain solvent. Learn to take a loss at the worst time – just before the market turns back in your favor. Recognize it as a cost of business. Like damaged inventory for a store. You’ll sleep better and be more profitable over time.

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