Zerodha’s Nithin Kamath shares tips on risk management for stock market investors: From mistakes to cutting losers | Stock Market News

Online brokerage platform Zerodha’s Chief Executive Officer Nithin Kamath highlighted the need for risk management as a stock market investor in his recent post on the social media platform X on March 17.

In his post, Kamath said that during his time as a trader and a broker, as a result of interacting with many successful traders, he realised that the common element for their success and longevity in the Indian markets is risk management. 

“In all my time as a trader and a broker, I’ve interacted with hundreds of successful traders, both large and small. The one common element to their success and longevity is risk management,” said Nithin Kamath in his post on X. 

Nithin Kamath’s Tips on Risk Management

Zerodha Chief Nithin Kamath shared a few tips highlighted from an old podcast by Jerry Parker, founder of investment firm Chesapeake Capital Corporation.

Jerry Parker is believed to be one of the Turtle Traders, a group of rookie traders who were trained by legendary commodity traders Richard Dennis and William Eckhardt who followed a specific rule-based strategy. 

1. Living to Play Another Day: Kamath highlighted the need for investors to be aware and stay alive in the stock markets to play another day. Parker, in his old podcast interview, highlighted a ‘Turtle Trader’ rule that when an investor sees their investments declining in value (drawdown), they should reduce their investments twice as fast as the drawdown.

“This is a Turtle Rule. That when you have a drawdown, you reduce your positions twice as fast as the drawdown. So, if you’re down 10%, you should reduce your positions by 20% and so on. And that’s a different day when we were trading really large, very few markets, very short-term,” said Parker, cited Nithin Kamath in his post.

This rule remains relevant to the current markets, and investors should reduce positions in case of imminent risks and live to fight another day. 

“But I think it still kind of applies that you want to have that one rule that always works. It’s always going to work. It’s going to keep you from losing too much. And that is just to reduce your positions and live to play another day,” said Parker.

2. Cutting Losers & Letting Winners Ride: Kamath’s second highlight was Jerry Parker’s ideology of cutting the losing stocks and letting the winners ride. Stock market investors should be wary about their active losses in intraday trading, as the losses can get really big really fast.

“I used to say, 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,” said Parker as per the post.

On the profit side, investors sell off their stocks too quickly as they think about losing the smaller profits. But according to Parker’s take, investors should be hopeful for a bigger gain. 

“And then the biggest mistake is when we have big profits, we’re very fearful. We’re fearful it’s going to turn into a smaller profit, but that’s when we should be very hopeful that it’s going to be a big, huge winner. So, I think that, you know, we’re always going against the way we’re wired,” he said.

3. Mistakes: Mistakes are essential for any stock market investor. Nithin Kamath highlighted Parker’s take on mistakes, which said that “over-trading” and “not following systems to a T” were among the big mistakes which people can make fueled by self-induced anxiety.

“But most of that has come from, honestly, from over-trading and not following my systems to a T, as a 100%, as much as I could have. Yeah. So, most of that was all self-induced anxiety,” said the Turtle Trader. 

“The markets I can kind of get over, I can turn it into a game, I love the game. I love playing and I love competing. But, yeah, that’s the two most important things. And I got that from Rich. I asked him, like, one day, what’s the two biggest mistakes we make? Or what are the biggest mistakes we’re going to make? And he’s like, oh, over-trading and not following your system,” according to Kamath’s post quoting Parker.

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