Why does Mr. Market hang on to his losers?

[rsinj]

4. Taking small profits and letting losses run
You must cut loss quickly when wrong and ride your winners. These will take care of your small losses.

But isn't this exactly what Mr. Market does and preaches with his model?

Look at the "24 straight profitable closed trades" - close the winners once they are up 15% to 20%, hang on to losers forever. Hey - every trade is a winner if you never sell a loser - right?

I am somewhat critical of Mr. Market's model. Granted - nothing wrong with being up 15% on 24 straight closed positions - however I think it's a little misleading.

If Mr. Market were to give the overall gain taking into consideration all the closed trades at about 15% gain each, with all the losers he's hanging on to (9 positions with 6 having losses of 25% or more with two at 60% loss) what are we looking at for the net gain? Depending how much money was invested in each position, the losers currently held could easily wipe out all of the gains of the 24 closed trades and more.

Clearly Mr. Market's model depends on following momentum, and as long as momentum continues things are fine. However, just as some of the losers Mr. Market continues to hold indicate, if you get in at the wrong time, then momentum can work against you. I find it ironic that Mr. Market doesn't sell based on the common 7% to 8% loss rule - or on any criteria for that matter on a losing position.

If you are going to identify your investments based on momentum on the upside, then you have to have a selling criteria which accounts for the stock not being 15% above your purchase price - as the original poster on this thread indicates.

[Karel]

But isn't this exactly what Mr. Market does and preaches with his model?

Look at the "24 straight profitable closed trades" - close the winners once they are up 15% to 20%, hang on to losers forever. Hey - every trade is a winner if you never sell a loser - right?

I am somewhat critical of Mr. Market's model. Granted - nothing wrong with being up 15% on 24 straight closed positions - however I think it's a little misleading.

If Mr. Market were to give the overall gain taking into consideration all the closed trades at about 15% gain each, with all the losers he's hanging on to (9 positions with 6 having losses of 25% or more with two at 60% loss) what are we looking at for the net gain? Depending how much money was invested in each position, the losers currently held could easily wipe out all of the gains of the 24 closed trades and more.

Clearly Mr. Market's model depends on following momentum, and as long as momentum continues things are fine. However, just as some of the losers Mr. Market continues to hold indicate, if you get in at the wrong time, then momentum can work against you. I find it ironic that Mr. Market doesn't sell based on the common 7% to 8% loss rule - or on any criteria for that matter on a losing position.

If you are going to identify your investments based on momentum on the upside, then you have to have a selling criteria which accounts for the stock not being 15% above your purchase price - as the original poster on this thread indicates.

Hi rsinj,

welcome to the board!

This criticism of MM's model is not unfamiliar. Indeed it is rather common. In the first instance the fault is not with the model, but with the 10 rules. They assume too much about the trading and investing practice. It is, for instance, also possible for a massive number of reasonable profits to outweigh occasional disasters. MM's model is perfectly to be able to keep the balance solidly at the positive side, especially in the long run. The balance is positive for the runs mentioned: on his website, MM shows 10 open positions, for a total return of -290%. The 24 closed positions amount to 360%, if we put each at +15%. In the long run, this imbalance will likely increase. It has done so in the past.

That said, it is very likely that someone could improve on MM's results, especially when the stocks are followed more actively. If you like a method that requires constant attention, MM's method will prove to be disappointing. It's more like buy and forget, until you sell. And the periodical cleanout, of course. We just had one. Possible areas of improvement are 1) timing the entry better, and 2) trying to get more out of the winners than 15%. But stops seem to be harmful: see Stops are for wimps.

Have fun, be critical, and do your homework.

Regards,

Karel

[rsinj]

Thanks Karel.

I am still confused as to why there isn't any sell criteria if a trade is a loser. Is it the intent to hold them forever if they don't come back? What if the fundamentals turn extremely negative?

MM's model is perfectly to be able to keep the balance solidly at the positive side, especially in the long run.

How do we know this? The biggest loser was one of the first purchases over two and a half years ago. When do you sell?

Also, the model accounts for the initial purchase, but if the stock goes down, you wouldn't buy it again, or more of it until the momentum numbers justified so, and it meets the purchase criteria again - is that correct? I think that's being too narrow - you identify a stock based on a strict set of circumstance - almost like the stars aligning. Now, if momentum turns negative, what are the chances that the stars realign? I notice Mr. Market has never purchased more of a stock.

It's more like buy and forget, until you sell. And the periodical cleanout, of course.

But, that's just it - I don't see the periodical cleanout.

In looking at the big losers - I'll be the first to say that they aren't bad companies - in fact, the fundamentals are ok. Now, if I had identified them as good buys, and they went down 50%, my thinking would be "hell, they were good buys when I bought them, now they are 50% off and they are good companies - I am buying more". If you believe in the model, then you know they are going to come back - why not buy more? I don't let the 8% rule dictate what I do either - because if I do my research, then why should some silly number tell me what to do?

Thanks again.

[Karel]

Hi rsinj,

MM does as he does and informs us about what he does. He likes to share his stock picks and reasoning.

What anyone wants to do with those picks and info is their business. I myself started out rather critical, but had the good sense to check what he was doing and I was favorably impressed. I cut what I was doing and started "following $$$Mr.Market$$$". My result since July 2001 is 12.5% annualized. Not spectacular, but satisfying, especially in view of the general market trend for the first five quarters or so of that period.

In that period I scored 100 winners and 17 losers, both with MM's own picks and my own MM-like picks. I think this is an indication that MM's method is able to keep the balance solidly on the positive side, even if that indication covers a rather short time frame (about 5.5 years) and a limited number of picks.

And yes, of course crashing fundamentals can be considered as a reason to sell, completely in line with MM's method of picking a stock. He just lets them ride longer than most other people would. On a sidenote: when the other stocks in the portfolio keep turning around with 15% profits, the losers quicly become a negligible quantity in a portfolio. Only when the "loser part" becomes too great a cleanup is really necessary, because there are not enough stocks left to do the churning. And yes, you missed the last cleanup, here it is: http://www.mrmarketishuge.com/showthread.php?t=1600

By the way, MM never "doubles down", because diversification is imperative for his method.

If you want to check all previous buys and sells, you could start with searching for threads with "winner" in the title, by user "mrmarket".

It is easy to get hung up about the big losers. I have a lurking suspicion that the people (not you) who completely go up in flames about MM holding on to his losers and claiming a winning streak amuse him no end, and give him another reason to hold them just a bit longer.

Regards,

Karel

[mrmarket]

Hi rsinj,



It is easy to get hung up about the big losers. I have a lurking suspicion that the people (not you) who completely go up in flames about MM holding on to his losers and claiming a winning streak amuse him no end, and give him another reason to hold them just a bit longer.

Regards,

Karel

As a parent, one of the things I have noticed is that the big difference between an adult and a child is that the adult makes informed decisions based on his knowledge and experiences and also that the adult has a lot more patience.

[DSteckler]

the adult has a lot more patience.

You haven't dealt with too many of my clients <VBG>.