Paul Tudor Jones
The photo in the background of Paul Tudor Jones’ office says it all: Losers average losers. Jones’ wisdom was obviously lost on James K. Glassman judging from the following excerpt from his Washington Post investing column:
If you had Enron in your portfolio and didn’t sell it at $90 or even at $10, don’t feel embarrassed. As Alfred Harrison, a money manager at Alliance Capital Management Holding LP, which owned a ton of Enron, put it, “On the surface it had always seemed to be a fairly good growth stock. We bought it all the way down.”
Glassman and Harrison are both dead wrong. You must feel less cash in your pocket if you average losers, not just embarrassed. Harrison violates a cardinal rule of trend following trading. Even worse, as an active money manager for clients, he admits to averaging losers as a strategy. If the trend is down, it’s not a buying opportunity. It’s a selling opportunity or a “time to go short” opportunity.
The absolute wisdom is on a simple piece of paper hanging right behind Paul Tudor Jones’ head: “Losers average losers”. Think about it.
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What “Losers Average Losers” Actually Means
Harrison’s statement, “We bought it all the way down,” is not a confession of a single mistake. It is a description of a systematic approach to destroying capital. Each time Alliance Capital bought more Enron as the price fell, they were adding to a position that the market was telling them was wrong. The market was pricing Enron lower on each successive day. That falling price was the market’s collective judgment, incorporating everything every participant knew or suspected about the company, including information that had not yet reached public disclosure. Alliance Capital was buying against that judgment, not because they had superior information, but because the original thesis felt correct and a lower price felt like a better deal.
The falling price was not a sale. It was a warning. The trend was down. In trend following terms, that is not a buying opportunity. It is an exit signal or a short entry signal. A stock that falls from $90 to $10 to eventually near zero is a market that is trending down with sustained force. Every systematic trend follower was either not in the position or had exited as the stop was hit during the initial decline. The Alliances of the market were doing exactly what Paul Tudor Jones’ sign warns against.
The insight behind the sign is mathematical as well as behavioral. When you average down into a losing position, you are increasing your exposure to a market that is moving against you. You are spending more capital to lower your average cost on something the market is progressively valuing less. If the thesis is wrong, which the price is telling you it may be, you have now lost even more capital. If you are right and the price eventually recovers, you break even rather than profit. The risk-reward of averaging losers is asymmetric in the wrong direction: large additional loss if wrong, modest improvement if right.
Jones’ sign is not just trading advice. It is a summary of what separates traders who survive and compound from those who don’t. The instinct to average down feels like discipline, like buying value, like not panicking. It is none of those things. It is the psychological mechanism that converts small losses into large ones by adding capital to a position that the market is consistently voting against.
Frequently Asked Questions
What does “losers average losers” mean?
It means that traders who are losing on a position and respond by buying more of it are making a systematic error that compounds their losses. The falling price is the market’s collective verdict on the position. Adding to it does not improve the odds that the verdict is wrong. It increases the capital at risk on the assumption that the market is mistaken and will eventually reverse.
Why did Alliance Capital continue buying Enron as it fell?
Because the original fundamental thesis felt correct and a lower price felt like a better opportunity to accumulate. This is the classic averaging-down rationale: if it was worth buying at $90, it must be an even better deal at $40 or $10. The flaw is that the price itself is information. A market that falls persistently from $90 to $10 is telling you something about the validity of the original thesis. Alliance Capital chose the thesis over the price, a choice that resulted in buying all the way to zero.
What should a trader do when a position is trending down?
Exit at the predefined stop loss, or if the trend is strong enough, consider a short position in the direction of the trend. A falling price is not a buying opportunity in systematic trend following. It is an exit signal. The stop loss converts a potential catastrophic loss into a defined small loss. The position is closed, the capital is preserved, and the next signal is awaited.
Why does Paul Tudor Jones have this sign in his office?
As a constant reminder of the instinct that destroys trading accounts. The instinct to average down is one of the most natural and most dangerous in trading. It feels like discipline. It produces disaster. Keeping the reminder visible is a discipline device, the same function that written trading rules serve: making the correct response automatic before the emotional moment arrives when the incorrect response feels most compelling.
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