‘Cut your losers, let your winners ride…’: Zerodha’s Nithin Kamath shares risk management lesson amid market volatility

Zerodha founder & CEO Nithin Kamath (File Photo)

Zerodha founder & CEO Nithin Kamath has emphasised on the important position of risk management in guaranteeing the success of merchants, notably in unstable market circumstances.
In a X (previously Twitter) publish, Kamath shared insights primarily based on his expertise as each a dealer and dealer. Kamath famous that in his profession, he has interacted with a whole lot of profitable merchants, each giant and small. The one constant trait amongst them, he identified, is powerful risk management.
“The one common element to their success and longevity is risk management,” Kamath wrote. “This has become all the more important in markets like these when fear takes over and having an objective mindset becomes harder.”
His remarks come amid a difficult interval for the Indian inventory markets, marked by a protracted downturn.
As of February, the Nifty index recorded its longest-ever streak of 5 consecutive month-to-month declines. The benchmark Nifty50 index, which has fallen 17% from its all-time excessive of 26,277.35, closed Monday with a modest acquire of 0.5% at 22,508.75.
Kamath shared an outdated podcast of Jerry Parker, Chairman of Chesapeake Capital. Parker emphasised two key rules of profitable buying and selling: dwelling to play one other day and chopping your losers whereas letting your winners run.
Living to play one other day
Parker’s first key perception, which Kamath shared, is rooted within the “Turtle Rule”—a suggestion for navigating drawdowns.
When going through a drawdown, merchants ought to cut back their positions by twice the scale of the drawdown. For occasion, if a dealer is down 10%, they need to cut back their positions by 20%. Kamath highlighted this as a basic technique that helps shield merchants from deeper losses. “It’s always going to work. It’s going to keep you from losing too much,” he mentioned. “That is just to reduce your positions and live to play another day.”
Cutting losers and letting winners trip
The second precept Kamath echoed is the concept of chopping losers early and permitting profitable positions to develop. “When you have a loss, you’re thinking, I’m hopeful that it’s going to come back and turn into a winner, but that’s when you should be fearful that the loss is going to get bigger,” Kamath famous in his publish on X.
On the flip aspect, when income are rising, merchants usually change into fearful that the beneficial properties will shrink. However, Kamath famous Parker’s knowledge that it’s exactly when income are excessive that merchants ought to stay hopeful, permitting their positions to develop additional.
Lessons on errors
Kamath additionally mirrored on errors, sharing that most of the previous errors stemmed from over-trading and never strictly adhering to his buying and selling methods. “Most of that has come from, honestly, from over-trading and not following my systems to a T,” Kamath tweeted.
“Most of that was all self-induced anxiety.” He emphasised that whereas the markets could be difficult, having a transparent system to observe is crucial in managing stress and decreasing errors.
Kamath concluded by recalling recommendation he obtained from a mentor, Rich, concerning the greatest errors merchants usually make: “Over-trading and not following your system.” he famous.