In chapter “Dangerous Phrases,” I listed more than three dozen market sayings I’ve heard over the years that bother me to no end, some more than others. Some have been accepted as substantive statements simply because of the frequency with which they’ve been stated. Take number eight on that list, the utterance that a loss in a particular stock is “not a loss unless I take it.” It drives me nuts!
This line of thought indicates an inability to admit one’s investment errors. It reasons that the sale of that stock would make the loss final whereas continuing to hold it, even at a significant loss, still leaves the door open for some long-shot opportunity at a rebound. Failure to face up to an unhappy investment scenario certainly won’t make it go away, any more than not dealing with your emotional baggage will prevent continued difficulties in your personal relationships with friends and family.
There are times in one’s investment career, however unpleasant, where a loss is inevitable. You’ll need to accept this outcome. The only question is how large will it be? Simply thinking that time is on your side and that by waiting long enough the shares will return miraculously to their original purchase price soon (or possibly ever in your investment lifetime) isn’t market reality.
Look no further than the major market peaks in 2000 and 2007, from which some huge declines ensued. Some well- known companies back then aren’t even around today, or sell at mere fractions of their heyday highs. Losses that looked large became much larger, and stocks that looked cheap became much cheaper. There are many examples. When I hear someone opine that “it’s not a loss unless I take it”, what often follows is “besides, how much lower can it go?” (number one on our Dangerous Phrases” list). Regarding the latter question, the market will often show you. Furthermore, focusing a disproportionate amount of time and energy on situations like this can distract you from sufficiently monitoring the rest of your portfolio, just as turning a blind eye to a problematic marital, business, or parenting situation does not make for clearer viewing.
You need to tackle your investment decisions head-on. The rationalizations for delaying action abound, and none are acceptable when it’s your hard-earned capital on the line. The market has neither time nor tolerance for excuses. How often have we heard it said in life that “we are our own worst enemy”? It’s also true in the world of investing.
Moral: In the market, as in life, sometimes you need to resign yourself to the fact that a negative outcome can’t be avoided. The only question is how bad will it be? After all, markets and life both have their ups and downs. The challenge is how to keep the outcome manageable so that the situation doesn’t deteriorate further. The market is not a monetary arena where being right more often than you’re wrong translates into a profitable outcome. Far from it. A single loss can outweigh multiple profitable trades, so deal with the situation at hand.
(To be continued...)
This excerpt is taken from “Relationship Investing: Stock Market Therapy for Your Money” by Jeffrey S. Weiss. To read other articles of this book, click here. To buy this book, click here.
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