My academic and early on-the-job training at Salomon Brothers ingrained in me a basic principle of value investing: when an investment becomes cheaper, try to add to your position. The last thing you should want to do is sell out. Yet, this is precisely what you’ll do if you’re a follower of the “Cut your losses early and let your profits run” creed of investing. And you’d be in very good company, as celebrated speculators like George Soros, Paul Tudor Jones, and Jesse Livermore¹ attribute much of their success to abiding by this tenet.

In this short TEDx talk, I explore why the use of a pre-defined stop-loss can be valuable in important life decisions. In terms of investing, I explain why the stop-loss approach generates profits in addition to reducing losses (hint: think momentum).

Hope you find these ideas useful as you navigate the year to come, and beyond.²

1. Reminiscences of a Stock Operator (1923).
   
2. At Elm Partners, while we don’t use stop-losses per se, our rules-based long-only investment approach does incorporate exposure to momentum in asset prices combined with an attention to valuation. This was influenced in part by the long-term success of traders who followed the “cut your losses early and let your profits run” principle. This TEDx talk is meant solely for informational purposes and does not constitute an offer or solicitation to invest, or investment advice.