Imagine standing 60 feet from former professional baseball pitcher Randy Johnson. He's about to hurl a 100 mph fastball and you have one shot to hit a home run... what do you think your chances of success will be?
My guess... very, very small. Almost nil.
Of course, you could get lucky, close your eyes and swing as hard as you can, and possibly knock it out of the park. But I would guess that most people would agree that it would be very difficult to get even a base hit off of Randy Johnson in his prime, let alone a home run. (Some of you baseball fans might recall that it was a Randy Johnson fastball that basically pulverized a bird in a pre-season game in 2001).
Even the best batters in the world fail mightily against the top pitchers in Major League Baseball (MLB). Take Mookie Betts of the Boston Red Sox, for example. In 2018, he led the MLB in batting average, hitting .346. That means he failed 65.4% of the time.
Baseball and trading stocks have a lot in common. The biggest similarity is that the most successful traders -- and batters -- know they won't hit a home run or a base hit every time. In fact, there's a good chance that they'll strike out more often than they hit a home run. But the good traders know that it's not what their batting average is, per se, but how much money they make when they're right and, more important, how little they lose when they're wrong.
9 Investment Revelations For 2019
Unfortunately, most investors approach the market with the mindset that they're going to hit it big with the next stock. They put an outsized portion of their funds on the line. Little do they realize that they're facing Randy Johnson's fastball and there is a good probability they will strike out.
I bring this up because focusing on win/loss percentage is a common misconception I often see, especially when it comes to my Maximum Profit system. I get emails from prospective and current subscribers asking what my "win percentage" is. And while I'm happy to give them the stats, I usually know that if they are asking that question, they likely won't be a good fit for trading equities.
You see, the biggest hurdle investors face is their own emotions. If you want to be right 70%, 80% or 90% of the time, then it's going to be extremely difficult to grow your wealth. That's because it will be tough for these sorts of investors to cut their losers. These are the exact folks who watch a small loser morph into a big loser. Soon that 20% loss turns into a 60% loss. And now the great game of "hope" begins. They hope that it gets back to even so they can sell it without losing any money. They won't take a loss, because that admits defeat.
But let me ask you... do you think Mookie Betts considers himself a "failure" because he only got on base 35% of the time? Absolutely not. He knows it's a part of the game -- and he is one of the best at it (and he was awarded a $20 million contract for next next season for his efforts).
Just A Handful Of Stocks Drive Markets Higher
Consider this recent study from Hendrik Bessembinder of Arizona State University...
Bessembinder looked at the roughly 25,300 stocks that traded between 1926 and 2016. He found that during this time period these stocks generated nearly $35 trillion in shareholder wealth. However, more than half of these stocks delivered negative returns, and just 42.6% of the stocks outpaced the returns offered by risk-free Treasury Bills.
What's more, just five companies (Exxon Mobile, Apple, Microsoft, General Electric and IBM) accounted for 10% of the total wealth creation. And 100% of the wealth creation came from just over 4%, or 1,092 stocks.
In other words, even had you bought every single stock in the market you still wouldn't come out with a positive winning percentage. This also tells me that you need a system like Maximum Profit to help you identify that 4% of winning stocks.
So instead of worrying about how often you're right, start focusing on making money.
You do that by letting your winners run and cutting your losers short.
We only need to look at the performance of my International portfolio in 2018 to prove why this is so important. I talked about this in my December 28 issue of Maximum Profit...
We closed 11 trades in the International portfolio in 2018. Of those 11, only two were winners. That's a success rate of only 18%. Yet, even with that dismal win rate, my International portfolio outpaced the S&P 500 3-to-1. That's right, it provided investors with a 12% return on their investment versus a 4% return had they invested in an S&P 500 index during those same periods.
Of course, this is just an example. Our other portfolios fared much, much better in 2018. But it just goes to show that you don't always have to be "right" with your picks in order to do well. Even when your picks aren't panning out the way you hoped, you can still come out ahead. But only if you cut your losers short and let your winners ride.
(This article originally appeared on StreetAuthority.com.)