The reason that pain hurts is because it should.
Pain is nature’s way of telling us to get out of harm’s way. Like fever tells us that something’s not right inside of us and that we must take the necessary medication to avoid doing a greater harm to our body.
This is also true when it comes to investing in stock markets. When the market moves and I’m losing money, I know it hurts.
But more often than not, unlike in life, I would continue to bear that pain (keep holding my losing stocks) instead of taking the medication (cutting the losses) to avoid a greater harm in the future.
No one is right all the time and I don’t have to be.
But this wasn’t something I believed a few years back, till the time I took my first major loss in a leading textile stock.
Here is how that stock (and my thoughts on it) went after I’d purchased it in 2004…
Data Source: Ace Equity
Luckily for me, my investment in this stock wasn’t large enough to wipe me out. But it was large enough to hand me a lesson.
I’d always thought, “I’ve to be right 100% of the time to make money from stock markets.”
But as this loss (and the subsequent profits) taught me, and also what I learnt from observing several successful investors, you can make good money from stock markets by being right only 30-40% of the time.
The core investing lesson I learnt from this loss was…
It is important for you to believe in your investment decisions, but your discipline must always trump your conviction.
Most people invest in stocks to make money, but the game must begin and end with defense.
You need to follow the Hippocratic rule of managing money, which is – Don’t lose money.
So while most investors worry about the gains, I’ve learnt to focus on the losses. And when I see losses, I cut them short.
I feel lesser pain when I take my losing stocks off the table.
I might not take the whole loss right away, but I’ll take enough of it to stop the pain and protect my principal.
If I’m selling at a low price after having realized my mistake, so be it. I give myself the permission to be wrong and the ability to change my mind as conditions warrant.
But like I’ve seen with most investors – they will wait…and wait…and wait.
They’ll sit on losing positions or even add to them in the name of ‘averaging’, while patiently hoping to get back to their cost, at which point they’ll sell.
You see, when there is pain in your portfolio, you’ve got to make tough decisions. Ignoring the problem isn’t one of them.
It won’t mean that you are a bad investor. What it would mean is that you are a realist.
Believe me…in order to succeed in stock market investing, you must first know how to survive. Learning to take a loss once in a while is simply part of the game.
I learnt this from my first loss 3 years back. But I thank my stars for that.