So I am pretty sure that I have done this. Or at least it is a question I should ask myself.
If I kept investing in strategies while they were doing well and then abandoned them when they had a big drawdown what would happen?
I think the short answer would be that I would be giving money to the professionals that had a strategy that they could stick with.
This is not a new idea. It is the idea of gamble’s ruin. And is clearly part of why casinos stay in business. In addition to having the odds in their favor with each spin of the roulette wheel a gambler will leave the table after he has lost all of his chips—clearly a net win for the casino (and not requiring a proof, I hope). The casino winning almost every time because of the bet size and the casino’s larger bankroll. And not just because of the odds.
Gambler’s run adds that the casino wins even if the odds are with the gambler with each play—like with a good blackjack card counter. If her bets are too big she still gives up all of her money to the casino even if her card counting is flawless and the odds were truly with her on each play. And I would only add that she loses if she gives up the first time she is behind as well as when she faces complete loss of her original bankroll. This is actually the gambler’s ruin guarantee: “A persistent gambler who raises his or her bet to a fixed fraction of the gambler’s bankroll after a win, but does not reduce it after a loss, will eventually and inevitably go broke, even if each bet has a positive expected value.” Source: Gambler’s ruin
I am copying this idea. It has been a while and I forget which book it was but the author basically thought value strategies work because a disciplined investor could eventually go home with the money that the average retail investor leaves on the table after they closed out their brokerage (and possibly P123) account.
Jim