Keeping your losses small
We’ll close this article series with one of the most debated topics in investing: keeping losses small. It’s controversial because, as investors, most of us are predisposed not to cut our losers. But failing to act decisively can be costly.
Lessons from The Art of Execution
A highly recommended book on this subject is The Art of Execution by Lee Freeman-Shaw. He studied the behaviour of investors and found that they all tend to fall into three categories when share prices fall below their purchase price:
The Rabbit – freezes like a rabbit in headlights, doing nothing as losses mount. Rabbits were consistently the poorest performers.
The Assassin – cuts positions quickly and redeploys capital elsewhere, often using stop losses.
The Hunter – doubles down after re-confirming their analysis, averaging down on conviction plays.
The evidence showed that Rabbits consistently lose. Winning investors were either disciplined Assassins or thoughtful Hunters.
Personally, I fall into the Assassin camp. I dislike losses and use stop losses extensively in my personal portfolio. For investors who really know their companies and have conviction, hunting can be effective, but for most private investors without the time to do deep analysis, acting like an Assassin is the safer option.
The Asymmetry of Loss
It’s critical to understand how disproportionate losses become as they grow:
A 10% loss requires only an 11% gain to recover.
A 50% loss needs a 100% gain to break even.
A 90% loss demands an extraordinary 900% rebound.
This is why capital protection matters more than chasing gains.
Practical Stop-Loss Strategies
The challenge with small-cap stocks is volatility. Set a simple 10% stop-loss rule and you’ll likely get whipsawed out of good positions due to natural price swings. Instead, a volatility-based stop often works better.
Use risk ratings (like those published in stock reports) as a guide.
For an “adventurous” stock with 30–45% annual volatility, setting a stop around half that range gives enough room without exposing you to catastrophic losses.
I dislike losing more than 20% on any position. I usually exit at 10–15% down rather than waiting for stops to trigger.
Some investors set stops around technical support levels. While we don’t have time to dive into technical analysis here, the key is to avoid a rigid “one-size-fits-all” approach.
Matching Strategy to Time and Skill
Hunters need time, conviction, and deep research to average down effectively. But most private investors don’t have that luxury. For them, adopting Assassin-like discipline with stop losses is often the best way to protect capital.
Being honest about how much time you can devote to investing matters. If you’re busy, using automatic stop-loss rules may actually free you from “rabbit behavior” and help you act decisively. Many investing platforms provide automatic stop-loss rules.
Final Principles
Here are the key reasons to sell and keep losses small:
Personal Needs – If you need the money, that’s always a reason to sell.
Systematic Investors – Sell when your targets or thresholds are hit.
Discretionary Investors – Sell when the investment thesis no longer holds.
Opportunity Cost – Free up capital if a significantly better opportunity arises.
Position Risk – Trim oversized holdings that dominate your portfolio.
Stop Losses – Protect capital by capping losses, whether through hard rules, volatility stops, or technical levels.
As one final reminder: markets are unpredictable. Declining markets are especially brutal, and failing to act can cause lasting damage. Whether you lean Assassin or Hunter, the crucial thing is not to freeze like the Rabbit. Protect your capital, keep your rules clear, and stay in the game for the long term!