The Biggest Mistake I Ever Made

Why I Stopped Using Trailing Stop Losses

Inside today’s Daily Journal…

• Essay: The Biggest Mistake I Ever Made

• AI’s thirst for power

• EQT’s strong Q4

• Iran and oil

• Chart Of The Day… Amrize

• Today’s Mailbag

Never sell a great business.

This is the “golden rule” to investment success. It’s the single most important thing you can learn to do as an investor.

It’s also extremely difficult to learn this discipline. Everything – the media, the market’s volatility, your spouse, your own demands for cash – conspires to force you to sell.

Here’s a brief list of some of the best businesses I’ve ever recommended. These are the total returns investors could have earned if they’d invested $25,000 and held until today.

Stock (when recommended): returns since our initial buy (of $25,000)

• Amazon (1999): up 8,000% ($2.2 million)

• Walmart (1999): up 1,300% ($355,000)

• Qualcomm (1999): up 800% ($244,000)

• Broadcom (1999): up 2,203% ($575,000)

• eBay (2006): up 850% ($236,000)

• Microsoft (2006): up 2,500% ($600,000)

• Moody’s (2007): up 1,000% ($300,000)

• NVR (2007): up 1,700% ($500,000)

• Starbucks (2008): up 2,500% ($660,000)

• Silver (2008): up 800% ($230,000)

• Visa (2009): up 2,800% ($750,000)

• Cheniere Energy (2012): up 2,300% ($600,000)

• Targa Resources (2012): up 800% ($244,000)

Owning any of these businesses would have made a material difference to your net worth – but only if you held through massive drawdowns. And, unfortunately, until 2018, I would have advised you to sell at some point on the basis of a trailing stop loss.

A trailing stop loss is a rigid, mechanical way to avoid taking a huge loss in any given investment. You simply set a level (such as 25%), and you sell any stock if it declines more than this amount from any high price while you’ve held it. This is a good way to trade momentum stocks and it’s a great way to avoid taking a catastrophic loss.

My mentor, Steve Sjuggerud, taught me trailing stops on virtually my first day working for him in 1996. And using them, I produced average annual returns of 14.9% a year from 1999 to 2018 in a long/short portfolio that was totally uncorrelated to the market. That was more than double the market’s return in the same period. So using trailing stops won’t prevent you from doing well as an investor. But they will prevent you from doing great.