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Letting Your Winners Run: The Disciplined Art of 'Sitting'

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Following the advice of legendary trader Jesse Livermore.

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"Let your winners run." Guessing you have heard that one a few times. Easy in thought and words, but perhaps the hardest investment axiom to follow – in my experience, even more challenging than "sell your losers."

In my last post, Understanding When Cash Is King, I referenced legendary trader Jesse Livermore's quote: "It never was my thinking that made the big money for me. It always was my sitting" via the must-read Reminiscences of a Stock Operator. In that post, I discussed the value of Livermore's "sitting" as it pertained to cash balances, whereas here I transition his advice to taking and holding individual investment positions.

As I look back at my own results, I've recognized trends consistent with Livermore's quote. It's quite possible to profitably and frequently trade in and out of positions and pocket gains, but the winners that leap off the page seem to always be the ones that required sitting.

For instance, over a 15-month period I logged 14 different short positions in Green Mountain Coffee Roasters (NASDAQ:GMCR), all of which were exited profitably. If I had followed Livermore's advice though, the first short position I took on July 29, 2011, at 105.49 would possibly still be on the books, and I'd be counting dollars instead of nickels and dimes given today's price. Inversely, that escapade reminds me of not confusing genius with a bull market.

These are the investments that positively skew your results – early investors in Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) who bought, held, and sat through the 1990s come to mind. More recent investors in companies like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), John Paulson's housing short or David Einhorn's Lehman – these are all positions that drove outsized returns but demanded extraordinary long-term patience.

Following Livermore's "sitting" advice helps to accomplish another thing -- a development of extreme discipline that forces you to try to buy right. The mentality of sitting and waiting demands selectivity, as you want to be as certain as possible that you are "sitting" with the right positions. It may seem counter-intuitive in today's schizophrenic, high-frequency trading market, but perhaps the best way to thrive is to lower your frequency, and "sit."

Editor's Note: This article originally appeared on the investing and economics site, See It Market.
At the time of this writing, Heart Capital held a short position in Apple.
Heart Capital does not offer investment advice via this medium. Under no circumstance whatsoever do these postings, opinions, charts, or any other information represent a recommendation or personalized investment, tax, or financial planning advice.
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