This commentary originally appeared at 8:33 a.m. EST on Feb. 15 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.
This week pitchers and catchers report, as baseball's spring training gets into swing this month.
As I have repeatedly written over the years, the real key to delivering good investment and trading returns is not your offensive ability and swinging for a high batting average; it is importantly about your defense on the field.
Let me explain.
A high batting average and an impressive display at the plate (measured by the number of stocks that rise in your portfolio as measured against your total positions taken) is important, but it is not as significant as many think.
The key to delivering returns is defense, controlling your risk by stopping your losses and, when you are up at the plate, letting your profits run.
When I mention a buy or a short on my diary, it is almost as important as how I manage the position as the actual performance of the stock.
Below are the two basic tenets that provide the foundation to good investment returns:
- Let it ride. If I buy Altisource Portfolio Solutions (ASPS) at $17 a share in late 2009/early 2010 and let it run to over $100 a share, it has an outsized positive impact on my returns. But only if I let it run.
- Stop your losses. If I buy Apple (AAPL) at $625 a share and stop my loss at $605 and don't let the loss expand on the stock's way to $450 a share, this is also a win. I have exhibited discipline, and I have contained my losses.
Now let's try an exercise.
Go over your profit and loss for your 2012 stock trades and investments. Now figure out an attribution of your returns by gains and losses. If your gains are large (no matter how few there are) and your losses (no matter how many there are) are small, you are successfully controlling your portfolio's risk and likely achieving good investment returns.