Winners Average Losers


“Don’t ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations that you don’t have control.” – Paul Tudor Jones

Paul Tudor Jones is one of the greatest traders of our time. So when he says don’t average losers (don’t add to a losing position) you should listen, right?


What you really shouldn’t do is trade at all. Why? To put it bluntly: because you’re not likely to be the next Paul Tudor Jones. No one is.

Most traders fail. I don’t say that capriciously; it’s backed up by every study ever done on the subject.

Brad Barber and Terrance Odean analyzed more than 66,000 households with accounts at large discount broker during the 1990s. Their simple conclusion: “trading is hazardous to your wealth.”

What’s also hazardous to your wealth is buying high and selling low, with the negative impact on returns known as the “behavior gap” (coined by advisor Carl Richards). Estimates of the size of the gap vary – but suffice it to say – investors are often their own worst enemy.


Source: Betterment

Is there an alternative? Yes. Forget being the next Tudor Jones and stop trading your investing portfolio with emotion. Learn to be happy with simple, boring asset allocation. That means sticking to a plan/process through thick and thin and, wait for it … averaging your losers.

Blasphemy for traders, I know, but as an investor winning by averaging your losers is simple math. Let’s run through an example to make this point clearer.

If you invested in the S&P 500 at the start of each year and held for 15 years, you would have had a 98.7% chance of a positive return historically (going back to 1928).


What was the one negative 15-year period? 1929-1943, with an annualized return of -0.2%. Within this period we saw the Great Depression and the worst bear market in history.

Lump Sum vs. Dollar-Cost Averaging

Now, we often talk about returns with the assumption of a lump sum investment on Day 1 (for example, the first day of trading in 1929). It’s easier to calculate this way and we like easy.

But the true return for the many investors that are saving and adding to their investment/retirement accounts each year can be much different than a lump sum return.

Let’s say you added $1,000 every year into the market, starting in 1929. Your overall rate of return on those purchases over 15 years is 4.9%, significantly higher than the lump sum return of -0.2% per year.

In recent history, the worst 15-year period covered 2000-2014, with an annualized return of 4.2%. But if instead of a investing a lump sum back in 2000 you added $1,000 every year, this rate of return improves to 8.1%.


How did the returns in both the 1929-1943 and 2000-2014 examples improve by dollar-cost averaging? Simple math. You were adding to the market at lower levels, averaging your losers during market declines. This averaging of your loses increased your overall return.

As it turns out, when it comes to investing, front-loaded losses can be a very good thing as they enable you to buy in a lower prices/valuations with higher prospective returns. All long-term investors still adding to accounts or reinvesting their dividends should hope for a bear market today and the opportunity to average down.

But what about the famous Paul Tudor Jones maxim?

While there are undoubtedly traders who have had success only adding to their winning positions, most traders fail using this and any other methodology. On the other hand, most investors who maintain a diversified asset allocation plan and dutifully add to their investments, even their so-called “losers,” succeed. The corollary: winners average losers.

With all due respect to Paul Tudor Jones, of course.

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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