It may be that risk control is one of the key factors in success. Either through diversification and a broad spread of investments, or having a defined loss per position and then having the discipline to sell. Position sizing is also important, not putting too much into one investment.
I read about a study in Scientific American many years ago regarding this topic, and IIRC the results of the study showed that accepting a loss and reinvesting was what separated the good ones from the others.
The argument as I recall it was that stocks that fell hard seldom recovered, at least on shorter timescales, thus it was almost always better to accept that loss and reinvest whatever is left in something else.
except for a lot of the mega caps today. Look at how much apple fell when they almost bankrupted themselves in the past and had to get steve jobs back.
Look at microsoft, when they almost lost to google (and clawed their way back).
The reason they seldom recover from a low, is that a stock being low is synonymous with the business being in financial trouble. Most businesses in financial trouble don't make it out.
But those who do are ones that managed to get somebody good to turn it around. Of course, as an investor, you can't know who's "good" until after they're done turning it around.
So in the end, those with deep pockets that can weather the lows, would end up with a superior return in the long run.
You are right that position sizing is important but for the opposite reason. Knowing your winners and then full on concentrating in them is statistically a big part of what makes successful winners.
For traders maybe, because they pyramid the position on the back of any gains made. But you also don't want to have so much invested in one company that it becomes make or break. A 10% loss on 5% of your portfolio is way more manageable than 10% on 50% of your portfolio.
No even for buy and hold investors. The best investors get only 55% of the bets right. Only a little better than a coin toss. The only reason the performance for them is better than the 55% metric would suggest is because they cut losses on losers early and push on winners.
Value investors pretty much do not use risk control as known from shorter term trading. They just buy low and sell when facts change (down) or prices change (up).
I think diversification is a key tenet of value investing. The margin of safety applies to the individual company but that doesn't guarantee success, so a diversified portfolio is one key method of reducing risk.
Right, but that diversification is into 5 or 10 companies. Risk management that you can find in various trading shops is a much more involved process than that.
