Quit. Always.

If you are an American of a certain age and have played organized sports in your youth you have no doubt heard your football/soccer/baseball/tennis coach utter the inimitable phrase, “Son, winners never quit and quitters and never win.” 

This was always uttered in long Southern drawl (I went to high school in Virginia) and usually with the certainty afforded only to the Ten Commandments.

Needless to say, that is the stupidest advice ever. In capital markets where quitting is not only necessary but vital to the very survival of your capital. 

I know. I know. In our Anglo-Saxon Protestant work ethic culture we are all taught to “stand our ground”. To fight rather than flee. And this is why almost every famous investor fails miserably in the end. Don’t believe me? Tudor Momentum Fund Ltd has returned a whopping 2.24% since its inception in 2009. Bridgewater has posted 4.5% per annum since 2005. The S&P during the same timespan? 10.29%. So like 228% more. Tiger Global which was touted as some of the smartest money on Wall Street lost 34% this year and went from outperforming the  S&P to underperforming it not just for this year but over TWENTY YEAR span with this one really bad stumble.  I could go on but it's just too easy and you get the point.

Quitting in capital markets is a vice not a virtue. Quitting your trades via stops. Quitting your strategies when the market regime changes. Quitting your fundamental bias when the economic facts prove you wrong.

This is of course a lot easier said than done. We are all culturally programmed to not quit, especially when it comes to us of the weaker sex who perceive making a mistake as a stain of shame on our masculinity. Yet every great military tactician from Sun Tzu onward will tell you that a retreat is often the best path to victory. Ask the Afghans, ask the Ukrainians. Ask any smaller foe that was able to defeat the bigger opponent. But when it comes to trading we all seem to forget that there is no bigger opponent than the market. No one can defeat the market. If you are on the wrong side of the trade it will eventually bury you. This is why so many famous investors like LTCM, Melvin Capital and  Amaranth can go from making money for years to losing everything overnight. Oh.., and Bill Hwang anyone?

Quitting is not only crucial when you trade, but actually makes you a much better trader by forcing you to appreciate ideas that are antithetical to your original beliefs. All my life I have been a fade trader. I am much more comfortable buying bottoms and selling tops. This, I am sure, was not a result of any genius, but simply a quirk of my personality which abhors all institutional authority ( so what better way to express that then by always being on the opposite side of the move?) 

But at the start of this year I stumbled across some very interesting equity research that showed unequivocally that stocks are a long biased asset on an intra-day basis. In fact over the past three years the upside skew has been so ridiculously large that it's like trading a 60-40 coin. It is basically a license to print money. Still, many traders refuse to acknowledge this fact and I was one of them. Until eventually I changed my strategy from just trading reversals to trading reversals and continuations. Guess how that is working out?

As Larry David would say, “Pretty, pretty good.”

Yet this late life conversion to “quit” my old mean reversion ways has had a deeper, more profound effect on my ability to analyze the market. For example while the long side bias is working now, I am fully mindful that it may disappear at any time. Like a true stoic I am learning to accept the world as it is rather than the way I wish it to be and that will hopefully keep in the game for much longer.

“Quitters never win” is dumb cliche and in my opinion should be replaced with more nuanced “winners need to change.”

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