First Officer: “Captain - one of our engines is failing.”
Captain: “Set throttle to maximum thrust on the failing engine.”

Even if you have never watched a sci-fi movie before, our captain’s response may sound a little odd to you, and for good reason. Engineering systems are designed to reallocate resources away from failing components and towards working components to ensure the system continues to work. Upon engine failure during flight, a pilot will redirect fuel away from the broken engine towards a working one, instead of doubling down efforts to the broken engine. This is synonymous to reducing capital from a losing stock market position and redirecting it to a working one.

“Run your winners and sell your losers” - Timeless advice endorsed by many successful investors including the Paul Tudor-Jones, ‘Naked Trader’ Robbie Burns and Mark Minervini and advice that you have probably heard hundreds of times before. And yet evidence shows many of us succumb to doing the very opposite. We persistently hold onto our losers as they continue to fall, vowing to sell them only once they return to their previous high. There is also a temptation to ‘average down’ in these stocks, which involves buying more of the losing stock, usually funded by selling our recent winners.

In ‘The Art of Execution’, one of the best books on selling strategy, Lee Freeman-Shor analyses the strategies adopted by 45 of the world’s top investors, summarising them into winning and losing styles. One of winning styles is an ‘Assassin’-like approach to losses - cutting them quickly, and a ‘Connoisseur’ approach to winners - being patient and allowing gains to compound over time.

Bill O’Neil had advocated a similar style several years before in his book ‘How to Make Money in Stocks’. Bill took this approach further, preferring to pyramid up position sizes. He suggested selling losers quickly and averaging up, buying more of a stock after it has risen in price.

Why selling strategies matter

To outline the differences that these various strategies can have on your wealth, assume you have a portfolio which only holds two positions: an investment in Stock A and a Cash position. The starting value of the portfolio is £10,000 and it holds equal weight in Stock and Cash - 100 shares of Stock A at £50 per share and a £5000 cash position. For simplicity we assume cash has a…

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