Cutting Your Losers
Hello friends. Greetings from the 2022 bear market, of which many of are coming to Jesus about its very existence. You were warned. Here we are.
First off, let’s be clear. This is not a prediction on when things will reverse or what’s in store over the coming months. I’ll leave that to your paid group leader and Arthur Hayes simping.
Instead I want to talk about what will save you from a life is misery and sabotage. I want to free you from the shackles of your own deprecation before the bear market squeezes the last of your soul as you puke your net worth into a 7.7% stablecoin APR. I want to give you the gift of control, of freedom and of reclaimed power.
Of course I am talking about the glory of cutting your losers, the greatest single power move any human participant can make in the game of life.
If I learned nothing else over the past few years doing thousands of quant backtests, it’s that drawdowns are what ruin long term gains. Nothing comes close. Cutting your losers early vs holding through large drawdowns amplifies the compounding by a mind boggling amount.
Hodling is a hilarious meme designed to waterboard you with the kool aid that every one else is drinking. Instead of following this poisonous groupthink, I invite you to take some risk, avoid drawdowns, enjoy generational wealth. Don’t turn off your brain so that you can watch Netflix in peace — do a little work and beat the index.
Behaviorally, most will not do this. As the bear swings it’s salmon-fishing talons at their portfolio, it’s easier to bury their head and wait it out.
But why are they waiting it out? What system is telling them to wait it out?
Liquidity restrictions aside, why aren’t they aggressively dumping your coins at the first sign of weakness?
While some point to the power of holding long term on things like index funds, BTC or ETH, they fail to show you how many coins on CoinGecko never came back from their death sentence. Betting on what will survive is no easy task. Statistically, you won’t unless it’s the top coins. Even then you’re subjecting yourself to the dark side of +70implied volatility asset.
To save yourself from this beta (pun intended) existence, you must learn to let go of the things that no longer serve you. You must cut your losers.
I will admit that this is no easy task. Sometimes it’s a pain in the ass to dig up your 9th ledger and find the liquidity necessary to dump the coins. During bull markets, that’s the whole point — you make it hard to sell things.
But during bear markets you should be ruthless.
The key cutting your losers effectively is:
- Having a proven trend based system
- Understanding portfolio theory
There is an argument for knowing how your tax situation currently is but that’s above my pay grade.
If you don’t know where to start, check out this paper:
The TLDR is to buy above the 10dma and sell below the 10dma (moving averages) vs simply holding the index.
Simple enough? Can’t be that easy, right? Wrong.
Note — that’s a LOG chart. Granted, this is over 100 years but luckily the implied vol and 24/7 trading of crypto gives us about 10x the speed. Can you imagine if you simply avoided these drawdowns? Cut your losers.
The second component to all this is to cut your losers aggressively. I say cut your losers because chances are you have winners and losers in your portfolio. Isn’t it tempting to take profits on the ones that bounce but not do anything to the positions still underwater? Come on bro.
In bull markets you want to cut your losers + add to your winners. In bear markets you want to cut your losers and stack stablecoins. You are trading crypto for time. Get OUT of the market until you are holding things that are going up.
This does not mean hold your the coins that are performing best, it means that you should sell everything with equal emotion. All you want are assets that are going UP or stable.
If you have a long term conviction for something, obviously think twice about selling that, but otherwise you sell any asset that breaks your rules immediately.
It’s painful to swallow this truth when you’ve held through a 60% drawdown already. I felt the same way at 6K BTC in 2018. Then the floor fell out and it traded at 3200. I wish someone had drilled into my head that you can always buy back if you made a mistake.
It’s better to panic sell + rebuy higher than hold through the entirety of a crypto bear market. Write that one down.
For all I know, this is the bottom of the crypto bear. Maybe equities go on one final run to 6000 SPX, BTC launches to 80K and we witness a blow off top that signals the end of modern capitalism.
Or maybe we are about to witness a market nuke the likes of we haven’t seen since March 2020 with no Fed to bail us out. I have no idea.
What I do know is that many people are waking up and watching the markets and are STILL complacent about how much crypto they hold. They hold things that they are not willing to hold for another 50% drawdown simply bc it’s too painful to unload the position at the lows.
They forget that markets always test your convictions. If not today, it will happen soon. You will never get out alive unless you really believe in what your portfolio consists of.
Look at the coins in your portfolio. If I gave you cash right now, would you buy them back today? If not, wtf are you doing? Cut them.
Look at the people in your life. Do you talk to people who aren’t really that great? People who don’t make you feel good about yourself or waste your time? People who take from you and never give back? Cut them.
Look at the what’s in your house. Are you eating foods that slows down your path to peak health? Or keeping you from your fitness goals? Cut them.
Look at all the things in your life and ask yourself, “is this moving me forward or not?” If it’s not moving you forward, cut it. Life is too short for anything but bull markets.
Think like a trader. Cut your losers.
