Nobody likes to be a loser, but taking losses well is required in order to be a winner. Just ask some of the most prolific hedge fund managers of all time. George Soros once said (I’m paraphrasing), it isn’t about being right, it’s about how much you make when you are right versus how much you lose when you are wrong.
Soros’ extremely successful disciple, Stanley Druckenmiller, once said in an interview that he estimates he is right about 60% of the time. This means he is wrong 40% of the time. Paul Tudor Jones, another billionaire macro legend, once said he is wrong about as often as he is right, but he also echoed Soros by saying that what matters the most is how much he makes on his winners when right versus how big the losses are when wrong.
That means that some of the most successful hedge fund managers in the world are wrong, a lot. And they don’t care because it is part of the game and not what really matters most. What they care about is managing the risk on their ideas and seeking asymmetry between their winning and losing ideas.
Accepting losing is of course easier said than done given it is human nature to dislike losing, so for many taking losses frequently can be a jagged pill to swallow. But you should embrace it, actually, because it is just part of the game and what will keep you in the game in the long run. Furthermore, the faster an idea hits its stop the faster you can move onto the next potential winner.
Not all losses are created equally. What should raise red flags is when you are constantly taking losses, or taking outsized losses relative to your wins. A loss could be a function of market conditions not conducive to your trading style/strategy, or it could be something deeper that implies you are not consistently following your trading rules.
When suffering a losing period (drawdown) take a close look at what you are doing. Examine your trade log, go through your journal, see if you are following your trading plan or deviating. If deviating, then you need to figure out what you need to do to get back on track. This is when losing isn’t acceptable, because it is self-inflicted.
However, if you are following your plan it could be a function of a market not conducive to your strategy, and while you should be flexible to adapting to market conditions, a solid time-proven strategy over multiple cycles should still come out ahead. The key here is to be consistent and seeing the strategy through the ups and downs.