Entering text into the input field will update the search result below

Risk Management And Taking 10% Losses

Mar. 09, 2021 9:05 PM ETFUBO, KIRK, M, BFX60 Comments


  • This is a portfolio strategy piece as I share lessons learned over the past twenty years.
  • Position sizing, risk management, and stop losses are important portfolio management skills that need to be fine-tuned.
  • 10% losses can quickly spiral to down 20%, 30%, and even down 50%. More often than not, doubling down is a bad idea.
  • This idea was discussed in more depth with members of my private investing community, Second Wind Capital . Learn More »

Today's piece is about portfolio strategy and risk management. Every week I spend upwards of fifty hours reading, synthesizing, and thinking about markets. It is both a passion and obsession. Most of this time consists of reading company conference calls, reviewing 10-Ks and 10-Qs, reading SA's excellent and comprehensive news coverage, writing articles, and interacting with Second Wind Capital members. In addition, perhaps ten percent of my time is spent reading free site articles by other authors.

Incidentally, while reading the work of some other authors, I have observed that bold article headlines and assertions like 'Buy The Dip', 'The More It Drops, The More I Buy', and 'I'm Betting Big' seems to be very popular with the readership. As an author with the pen name 'Courage and Conviction' I used to think this way too.

After all, if you loved an idea at $10 and you bet 10% of your portfolio on it, at face value, it seems like a good idea to double down after a 20% or 25% loss. However, upon reflection and after twenty years of accumulating battle scars (I am 40 years old), I have evolved and realized the folly in this misguided thought process. I will explain why I no longer think on this wavelength.

For context, 2020 was an auspicious year for me as an investor. The total return of my portfolio was 93% and this was despite maintaining significant percentages of cash from July 1, 2020 - December 31, 2020. If you have been closely following my work you might recall a pivotal piece that I wrote on April 29, 2020, titled: Taking My Medicine (Losses). For many readers the idea of taking a loss seems crazy and akin to admitting defeat.

Moreover, so many people maintain the notion that they need to

Second Wind Capital is a catalyst driven/ trading oriented service with an underpinning tied to value and out of favor sectors. In 2020, my portfolio had a total return of +93%. Join now with a 2-week free trial and follow my real-time porfolio.

This article was written by

Courage & Conviction has been investing for over twenty years and has spent five years working as a buy-side analyst within a $45 billion investment-grade bond department, 3.5 years as an energy analyst, in addition to various other corporate finance roles. He has been a full time investor and author since 2020.

He leads the investing group Second Wind Capital, providing in-depth analysis on under-the-radar smallcap value ideas. He shares his real-money portfolio and does research based on fundamentals, synthesizing industry ecosystems and regularly interviewing management teams. He teaches community members to embrace volatility and exercise patience to drive alpha creation.

Analyst’s Disclosure: I am/we are long FUBO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

And long NLS.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (60)

As a novice investor/trader I don't really understand the article. If you have a very strong thesis and a time horizon, why would you book losses in the short term?

Like, I found a stock in February that I found undervalued and I put a target of +50% in 2 years. Then at the end of February/beginning of March, all stocks drop and my stock drops 15%. Isn't it idiotic to realize the loss? Shouldn't this be a time to buy? Shouldn't I buy when prices are low and sell when prices are high?

I mean, sure the stock could drop another 15% and another. I should probably not double down again and again. But I should probably buy more if it continues to fall - as long as the thesis is intact. Once it starts to rise again, I can start taking winnings to scale back the position.
Your a trader and not an investor. Way to short sided. Sure you made 90% gains last year but over the long term you will leave a ton of gains on the table by taking 10% losses and flipping between stocks.
Courage & Conviction Investing profile picture
@Kyle Kroeger So my 93% performance, in 2020, is documents here. This isn't an excel spreadsheet.


Lo and behold, I am up 40% YTD (market to market through today).
@Courage & Conviction Investing You can make crazy gains as a trader. Imo there is nothing wrong with that. But I'd agree with Kyle that this style is closer to trading than investing.
bprinc11 profile picture
Great point - defining and sticking to exit strategies is hard. I freely admit I have done poorly and ridden a few dogs down and waited for a long time for it to come back because I had no methodology like 10% stop loss.  

My heart is in buy and hold / don’t sell if the story has not changed for a company, but upon reflection I have to admit it always hasn’t worked. I am not very good at making sure the original thesis is intact or interpreting new information to recognize the thesis is no longer valid.  

Thanks for your article.
Courage & Conviction Investing profile picture
@bprinc11 Glad you liked the article. So 10% is just a rule of thumb. Perhaps, 15%, etc. The point is that doubling down, tripling down, etc. is dangerous. Have an exit strategy and don't be afraid to take a loss. The professionals don't double down. They add on strength.
Justin Dopierala profile picture
@Courage & Conviction Investing We double down often and rarely or never on strength.
Hewitt Heiserman profile picture
Excellent article @Courage & Conviction Investing. The key point here is to know ahead of time the max that you're willing to lose, or risk, so you don't turn a small loss that you can afford into a big loss that has devastating consequences. My limit is one percent of my account value.
turk617 profile picture
I loved FUBO and still do... I sold 10 $35 3/19 PUTS when it was trading about the same 38$....I never sell a PUT on a stock I dont want to own. Even If it was PUT to me @35$. Which it still may..Im hoping it doesnt fall that much below 35....If it does I usually do one of 2 things. 1-I wld sell $35 calls for month or two after, while selling PUTS for below the current price. That is how I avg down on a stock I believe in—while mking mny along the way. Secondly, I can buy more shares at current price and sell calls against my ttl position as well. May not work for everyone, but I love it and works for me...again dont sell secured PUTS on a stock you dont want to own and dont put more than 10-15% of your portfolio in one security...except cash!
Courage & Conviction Investing profile picture
@turk617 Thanks for the comments. Incidentally, I took my medicine and modest loss on $FUBO yesterday at $33.50. I need to get back in my swim lane. $FUBO could be $100+ or $15. It seems binary. we shall find out over the next few years.
Dickey Fox profile picture
I guess stop losses have a purpose. But if a stock gaps down, understand you won't get that price. My first momentum pick of 2020 was TSLA. I bought in right at the split announcement, they were rumored to go into the S&P and Battery day was on the horizon. RISK ON!! Well it flew up so fast, I got nervous about profits and I put in a trailing 10% stop loss on 50% of my position. Well it got taken out shortly thereafter. So, I used it as profit protection but I hated the automated result. I probably should have set a wider SL on that one.
In 35+ years of investing, I have never used stop losses. I rode out all corrections and crashes and came out on the positive side every time. If I feel a company is not what it was when I bought it, that is when I sell. I don't sell at corrections. I buy more shares of the companies I like at corrections. That is why I always have cash on hand and at the ready.
@MojoRisin1 Maybe some investors buy stop losses because they buy a large number of positions and keep track of them properly. I agree with you. I don't see the need the need for stop losses
Eileen Dover profile picture
@MojoRisin1 I use stop losses to protect a good profit on the way down. I will not put them too close to the current price so that a bad day would trigger them. I have saved a lot of money doing this and as soon as it triggers I set up a repurchase limit at the price at which I would be willing to buy it back.
stuartsegan profile picture
@MojoRisin1 certainly glad you have been successful. If your stock picks have been good - sounds like they have been - your portfolio would probably be multiples of what it is with some kind of stop loss strategy.
This article makes much more sense than I expected it would.
Chris Lau profile picture
Conviction is having 💎🙌.
Huge payoff for those who were not just lucky.
An incoming tide of $1.9T should lift some boats. Not all, but some. Pick those boats.
The 10% stop loss is an industry rule of thumb that many people use. Why is it 10% ? It is not arbitrary. Here is some math for you:

0.9*1.1 = 0.99 ~ 100%
0.75*1.25 = 0.9375 < 100%
0.5*1.5 = 0.75 << 100%

See if you can figure out what I am trying to say.
@ding dong It seems like you're making a good point, but I'd appreciate if you could also explain in plain English what you're saying with math.
Siyu LI profile picture
@RenoGuy in English - recovery takes more effort than decline. Thus 10% drops followed by 10% recovery is better than 25% drops followed by 25% recovery.

The math/logic has 2 problems I can think of:
1. For the same argument, 5% stop loss is superior to 10%. is it true?
2. This assumes the market up/down is a complete random work, while it is true in short term (minutes/hours/arguably days), it is decidedly untrue in long term. Thus that math doesn't apply.

Risk0 profile picture
Brilliant article. Ive started following that thought process, aka "if the market is right maybe I'm wrong". Pity though, sometimes we r just right. think AFI, which I bailed out of, saved a pummeling but did not reenter.
Courage & Conviction Investing profile picture
@Risk0 The key to this game is avoiding the drawdowns. In my swim lane, I can pick stocks with the best off 'em. However, if you want to last in this business, you have to manage your risk. Only the pros and sophisticated investors realize this. Hell, it took my 20 years and the help of some great mentors to work it out : )

I fully expect that the vast majority of people will read this and conclude that this CCI Kat is off his rocker.

You can sell a lot more subscription with article like 'Buy the Dip' and 'The More It Drops, The More I Buy', but let's keep it real and tell it straight : ^ )
Courage & Conviction Investing profile picture
@Risk0 At first blush, $ADES' earnings report looked good to me. I need to dig in and tune into tomorrow's conference call. Are you still long 💎hands : )
Hewitt Heiserman profile picture
@Courage & Conviction Investing I read many articles on Seeking Alpha telling readers to buy the dips on Sears Holdings, Linn Energy, Chesapeake Energy as they plunged.
Thanks for the thoughtful article! Having a plan in place definitely helps mitigate potential losses. Question for you in regards to the recent tech selloff: if you owned one of the companies that dropped recently but you're sure it's temporary and they will rebound and hit new highs, wouldn't "buying the dip" be a good strategy? How do you determine the difference between an irrational selloff of a great company that will rebound and a selloff that languishes for years or never recovers?
Courage & Conviction Investing profile picture
@tptguy I am mostly a value investor, but I do like GARP investing. I don't do much in tech land, so I never understood the rich valuations. Some of these SaaS companies are trading at 50X revenue (yes, revenue and not EBITDA). I am out of my depth when it comes to technology, so I don't have a good answer or a strong opinion. That said, I take a hybrid approach, and think of my portfolio as core investments and trading oriented names. If you are in high beta growth names and if you are on the wrong side of momentum, a 10% loss can happen in a day (outside of earnings) and a 50% pullback can occur in a few weeks (see $ARKK) and many of the tech high fliers. The $64 million question is this move in the Nasdaq, after the 10% correction, a dead cat bounce as real technical damage was done or is this a buying opportunity. I'm not smart enough to know.
@Courage & Conviction Investing Thank you for your candid opinion. Given the quick up and down of tech, it's definitely a tough call. Hopefully I make the right choice!
Market Map profile picture
The odds of producing excess returns above a buy and hold of "benchmark" through the trading of individual stocks, with the headwinds of behavioral biases and short term capital tax treatment being hurdles, are slim. However, investment in low expense exchange traded funds with long term track records, have been a viable solution towards producing excess returns above benchmark.
An investment in large cap value, the Nasdaq 100 (QQQ), combined with a "stodgy" portfolio of water company stocks, has produced excess returns above Berkshire Hathaway while generating up to an annual "10%" inflation adjusted income withdrawal over rolling 20 year periods since 1986. https://tinyurl.com/yya2x6kt
A growth trajectory and history of excess returns of this caliber, can instill a confidence in a "buy and hold" mentality, and ease the mental burden and uncertainty of participation in the equity market, while providing a reasonable income stream.
Buyandhold 2012 profile picture
It is NEVER a loss unless you sell at a loss or unless the company goes bankrupt.
@Buyandhold 2012 - Such a simple concept that so many people fail to grasp. The market comes back and goes higher 100% of the time.
@MojoRisin1 but some stocks take years to regain what's lost, much less grow. How many investing years are you willing to give up in order to return to even, much less inch ahead?
SqueakyToy profile picture
The market goes higher over the long term, but some stocks never recover their former glory and the lesson of their charts litter the screen.
Dickey Fox profile picture
I think it makes sense to identify and implement some risk management concepts in a portfolio. However, Every stock feels like a battleground stock these days and famous Peter Lynch or Warren Buffett quotes don’t ring as true in this market. Over the past year, I’ve learned a few new patterns about my losers, which very fortunately have been few. Don’t buy in the mornin, buy at the close, when the day traders are closing their positions, don’t chase a battleground stock on momentum news, be patient and buy when it’s losing the battle. If the “story” is still intact, I do buy 10% or more down. Just because it’s 10% or more down, doesn’t make it a weed. I’ve had several of my battleground stocks do very well, double digits quickly and then get hit by short reports. That’s as battleground as it gets. NNOX has been one of those. Same with TSLA, FUBO and PLTR. It helps me tremendously if I can take out my cost basis. Then it feels like house money. I use the phrase, am I capital “C” committed to a stock? I suggest you apply the same concept to “courage and conviction”. “Buy low, sell high”. Anonymous.
Courage & Conviction Investing profile picture
@Dickey Fox Interesting and insight comments - thanks.
Baron_Samedi profile picture
What stocks do you have in your portfolio just curious
Courage & Conviction Investing profile picture
@Baron_Samedi I am not sharing those on the free site at the moment. I might share the write ups at a future date (but I wrote up all three names on my Marketplace).
Eileen Dover profile picture
@Courage & Conviction Investing If we pay for entrance to your marketplace, who knows what you won't share with us then, unless we pay even more? No thanks.
Courage & Conviction Investing profile picture
@Eileen Dover ; ) As far as I know, there aren't any other Marketplace authors that post actual account performance. I know Roaring Kitty does it, but not sure if anyone else on SA does. And I'm not talking about excel spreadsheets and paper portfolios : )
Siyu LI profile picture
I appreciate you sharing the investment process/principles with the community. It is a good read, and I think can yield fruitful discussions.

a rule-based process-driven investment strategy is essential, to any investor striving for long-term success, which I think is the unspoken key point in your article.

On "x% stop-loss rule":

I think a successful risk management framework allows the investor to make rational decisions under any circumstance (no panic attack), - for some "x% stop-loss rule" is the right solution, and it has merit - it is simple and effective, but it has drawbacks as Tim mentioned early, it is arbitrary and counter-intuitive especially to certain value investors.

I am one of them. I don't follow x% stop-loss. In the meantime, my single stock position ceiling limit (at cost) is 3% of the total portfolio. It is on the lower spectrum for a retail investor, at the cost of more stock picking. But that allows me to evaluate critical situations (e.g. 10% drop) in a calm and subjective way.

My point is rules and processes are important to long-term investment success, and each person shall find what works best for them. And to excel, what I find most important is to be open-minded, treat your investment like a machine, continue to measure it, identify issues, learn lessons and improve it.

thanks for sharing and happy investing!
Courage & Conviction Investing profile picture
@Siyu LI Thanks for the thoughtful reply.

There are different styles and approaches. I am a big Tim Terrific (Stabosz) fan and he has a great long term record.

That said, I have been fortunate to have had few rockstar mentors from the buy side. My NYC equity PM and someone else who ran $4 billion at Wellington (he was a partner there) for 10 years. I can assure you these two buy siders are equally as brilliant and equally as successful.

The 10% rule is a good general rule but it doesn't apply to every stock and in every situation per se. However, circa March 2021, the market is at nosebleed heights and everywhere I look stocks are dramatically overvalued. So today my task of finding quality companies that are mis-priced is much harder. At the moment, I have 3 Must Own stocks in my portfolio that are high quality and that I think can go up 30% to 100% each. I then have other trading ideas. When it comes to the more short term oriented stocks I am applying the 10% stop loss rule. And on the two occasions where I didn't, I got my head handed to me on $FUBO and $NLS (and NLS has great earnings and guidance was fine).

Through yesterday, mark to market, my portfolio is up north of 30% but there is a lot more baseball to play between now and December 31, 2021.

My other point and I think most people missed it was there so many questionable articles from very popular authors that caused retirees to get smoked (think CBL, WPG, MAC, etc.). MAC may or may not come back, the jury is out, but CBL is already toast and WPG looks like they are filing soon. So all the folks that bought CBL and WPG at $7 or $8 and were told to buy more at $5, buy more at $4, buy more at $3 then buy the preferreds.....How did that mis-placed 'Conviction' turn out?

Picking stocks isn't about being a hero and sound risk management is essential for long term success.

If I look at my history, I have an uncanny ability to pick stocks and come up with new ideas. I have identified so big winners. However, I have had a few big failures. And the big failures were based mostly on ego and confirmation bias. If I simply took My Medicine (perhaps 20% losses) and didn't double down, I would have saved so much bandwidth and capital.

Whether or not this doesn't like cool - I don't really care. My goal is to generate strong returns and minimize the drawdowns.

I fully expect that the vast majority of readers will choice to ignore my advice.
constable profile picture
I have two comments based on the differences between Courage & Conviction and @Timothy Stabosz , both of whom seem to me to make strong points.

1. On the percentage: to me, all tresholds are arbitrary, but/and the more you are a trader, the tighter your percentage should be; and the more you are a long-term holder of larger companies, the lower your percentage can be (and the less, perhaps, you should be bound by it).

2. Courage & Conviction deals mainly in smaller companies, where (it seems to me) there is a higher chance of the stock sinking and languishing, or indeed not getting recognized by the market until its potential time in the sun is over. NLS, for instance, could be back down to $5 in a few years -- pandemic over, Peleton takes over the space (think iPhone taking over from Blackberry and Nokia), and the company becomes a backwater. So C&C (or at least me, who subscribes to his service) needs to be very attentive to drops. Other services that I subscribe to recommend larger cap stocks, that probably will be around in 10 years, whether it be BIDU or XOM or FCX. Those stocks have gone up and down by 30 or 40% many times.
So I worry about my investment in NLS when it drops by 15%, but I figure that BIDU or FCX will recover from a 30% drop sooner or later (obviously, it might not, but if I've found the value and growth, my confidence when BIDU and FCX get volatile is much greater than when NLS does).
Owen213 profile picture
nice article
Dmitriy Kozin profile picture
@Courage & Conviction Investing where is the "conviction" part of your name? Taking 10% losses means no conviction. At some point I was down anywhere between 20-80% from initial entry point on many of my investments, not the least due to covid. Sold none of them due to price decline (but sold a couple due to thesis changing). GameStop, UNFI, M, TUP, MESA, CPLG, etc. worked out ok.

Selling is ok when something changes and causes one to reassess the initial thesis. Not because of some arbitrary price change.
Justin Dopierala profile picture
@Dmitriy Kozin Completely agree with Dmitriy. Love you CCI, but could not disagree more with this new investment thesis. Almost all of my best ideas have fallen 10%+ after I bought them. Rather than a tight stop loss you need to weight your entry better (and you need a better mentor). If you're so afraid of the stocks you buy, Dmitriy is right, you have no conviction. If you have faith in your investments, but want better risk management, then simply have more caution on your entry. Instead of putting 5% of the portfolio into a name - put 2.5% into it. If it falls 10%, up it to 5%, if it falls 20%, up it to 7.5%, if it falls 30%, up it to 10% and each time you are buying more and more at a lower price.

The further the stock falls, the better of a value it should be - unless something (other than the movement of the stock price) has changed your opinion on the stock.
Timothy Stabosz profile picture
Completely arbitrary, with no basis for asserting why 10% is the “magic number.”

As you well know, I am not a fan of stop losses. Value investors, in particular, need to know what they own, and selling on a decline (without a known change in the fundamentals) goes against every possible maxim, and is a slap in the face to the concept of buy low/sell high, which is absolutely fundamental. (I make most of my money on “reversion to the mean,” more than anything, so going for 10 or 20 baggers makes little sense to me, and Is not a primary operating principle.)

The bottom line is, if one needs an arbitrary rule to “save oneself,” then the truth is that that person doesn’t really know what they are doing. You can’t deny that.

I only sell something that drops on me, if the fundamentals deteriorate faster than the stock price. And if that stock was cheap in the first place, the fundamentals need to deteriorate rather dramatically, relative to the stock price, to justify selling. Which is exactly the reason why averaging down almost always makes more sense...at least when owns value stocks that have solid balance sheets, with a modest overall burn rate.
Courage & Conviction Investing profile picture
@Timothy Stabosz It will be an interesting experiment to see where I end up on December 31, 2021. Last year was easy as long as an investor/ spectator survived March & April 2020. The market now is bonkers. Factually incorrect Will Meade tweets about structural broken retail businesses that are empirically in secular decline move stock 100% to 200% for no good reason. Most of these stocks are junk and no respectable mutual fund manager would ever touch these business with a ten foot pole.

Think about that for a second - some random guy that may or may not have worked for Goldman Sachs can make up nonsense and then the WSB/ Reddit crowd rushes in. This will end badly, the question is only on the timing. 

I long for the days when fundamentals analyses actually mattered and the market would penalize you when you did your homework incorrectly. 
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

Related Stocks

SymbolLast Price% Chg
fuboTV Inc.
Kirkland's, Inc.
Macy's, Inc.
BowFlex Inc.

Related Analysis

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.